Brokerage firm Emkay Global Financial Services believes India's GDP may slow to nearly 7 percent primarily due to the uncertainty around geopolitical tensions and sharp gains in energy prices.
"We now see India’s growth slowing to nearly 7 percent in FY23 from 7.3 percent. We still see that the next lever of secular growth is missing, implying a consistent need for policy support. Private economic agents are unlikely to lead the growth story," said Emkay Global.
The brokerage firm added that even as the recovery in domestic economic activity is yet to be broad-based, going ahead, the effective fiscal policy impulse may be limited, and financial conditions led by monetary stance will only tighten ahead.
"India’s golden period of secular growth of 2003-07 was synced with the capex cycle pre-GFC. Consumption, specifically private consumption has been the linchpin of India’s growth story post-GFC, but it has been languishing since 2018 and has seen a secular hit since then," said the brokerage firm.
"Private investment, on the other hand, is endogenous in nature --it first needs demand to fire and utilization to rise. Meanwhile, effective fiscal impulse has been limited post-Covid, much like most emerging markets (EMs), unlike in developed markets (DMs) where the revenue expenditure multipliers have been strong," Emkay said. This, in conjunction with higher global uncertainty, sustained supply disruptions, higher input costs, lower corporate profitability and tighter policy reaction function of the RBI, will further curb domestic demand, the brokerage added.
India’s growth was in line with Emkay's expectations at 4.1 percent in Q4FY22, reflecting a concoction of unfavourable base effect and consolidation of activity.
On the production side, the GVA growth at 3.9 percent was led by the industrial sector slowdown. Growth plunged in manufacturing, partly due to supply-chain disruptions, led by the auto sector and sequential easing in corporate profitability, driven by rising input costs.
Construction rose 2 percent while electricity demand was resilient. Services slowed amid Omicron-related curbs, especially in contact-intensive services in Q4, with public spending being its linchpin. Services’ contribution to growth also slowed, led by trade hotels and T&C. Agricultural growth rose 4.1 percent, but the heat wave impact could be visible in Q1FY23.
Private GVA growth remained steady albeit low at 3.2 percent. The expenditure side showed dismal private consumption, while government consumption and GFCF improved, and net exports remained a drag despite healthy prints, albeit lower than Q3.
Emkay pointed out that amid a revival in urban demand, contact-intensive services are improving, and rural demand has seen some recovery amid better terms of trade. Meanwhile, labour absorption in manufacturing and services is rising, capacity utilization is improving, and there are signs of new investment gradually coming in. Investment activity is gaining momentum with higher capacity utilization and capital goods production registering an uptick.
Yet, the momentum of the recovery is still below full strength, warranting policy support, Emkay said.
"The geopolitical drag seems to have materially changed the energy order. The global price disruptions reflect a confluence of China's slowdown, protracted shortage of critical inputs, an extended war in Europe and demand curbing global policy actions. All of this poses downside risks to domestic economic activity," said the brokerage firm.
Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.
