India's economic growth is expected to slow down further to 4% in the fourth quarter of the fiscal year, primarily due to low agricultural output and elevated inflation levels, India Ratings and Research (Ind-Ra) says in its latest report. This in turn will also pose downside risks to the National Statistical Office's (NSO) GDP growth estimate of 7% for the full financial year FY23.

India’s economy grew by 4.4% in Q3 (October-December) FY23 after recording 6.3% growth in Q2 and 13.2% growth in Q1.

As per the NSO's second advanced estimates, India's FY23 GDP growth is estimated at 7%. However, the ratings agency believes there are downside risks to this estimate and the actual GDP growth may come in lower. The GDP growth works out to be 5.1% in 4QFY23, after factoring in NSO’s SAE for FY23.

The estimates of Ind-Ra are lower than that of the Reserve Bank of India (RBI). The apex bank has said the real economic growth for FY24 is projected at 6.4% against 6.8% growth in FY23, with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6% and Q4 at 5.8%. SBI’s research wing has estimated the Q4 GDP growth at 5.1%.

The GDP growth had moderated to a three-quarter low of 4.4% in Q3 FY23. The gross value added (GVA), which is the value of production, grew 4.6% YoY in Q3.

Ind-Ra says there exist downside risks to NSO’s SAE of GDP for FY23. “The ongoing spell of elevated temperatures in the northern regions in February 2023 has raised concerns regarding wheat production. In addition, the India Meteorological Department has warned of the plausibility of severe heat waves during March-May 2023. This could not only affect the agricultural output which has been pegged to grow at 4.3% YoY in 4QFY23 (as per NSO), but also keep inflation at elevated levels,” says Paras Jasrai, analyst, Ind-Ra.

Jasrai said it can have an impact on rural demand, which has been under stress in the aftermath of COVID-19. "Ind-Ra expects the annual GDP for 4QFY23 to come in at around 4%. A lower growth rate in 4QFY23 could mean the GDP growth for FY23 could be lower than 7.0%."

Ind-Ra believes industrial recovery is weak and has yet to become broad-based. "The industrial output growth came in at 4.3%, despite core infrastructure industries (having a weight of 40.3% in Index of Industrial Production (IIP) growing at a three-month high of 7.0% yoy in December 2022." 

Notably, consumer price inflation bounced back to a three-month high of 6.5% in January, but the wholesale inflation softened to 4.7%, respectively, in January 2023 from 5.7% and 5% in December 2022. Ind-Ra expects the retail inflation to stay firm at around 6.5% due to sticky food and beverages and core inflation in February 2023. 

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