India's gross domestic product (GDP) growth is projected to spike to a four-quarter high of 13% in the April-June quarter, owing to low base due to the second wave of the Covid-19 pandemic and robust recovery in contact-intensive services, according to ratings agency ICRA.

The ratings agency has projected the year-on-year (YoY) growth of the GDP and the gross value added (GVA) at basic prices (at constant 2011-12 prices) in Q1 FY2023 at 13% and 12.6%, respectively, a sharp jump from the 4.1% and 3.9%, respectively, recorded in Q4 FY22.

ICRA expects the sectoral growth in Q1 FY23 to be driven by the services sector, followed by the industry. However, the GVA growth in agriculture, forestry and fishing is projected to decline to around 1% in Q1 FY23 from 4.1% in Q4 FY22, on account of the adverse impact of the heat wave in several parts of the country, which reduced wheat output.

"The anticipated double-digit GDP expansion in Q1 FY2023 benefits from the low base of the second wave of Covid-19 in India in Q1 FY2022 as well as the robust recovery in the contact-intensive sectors following the widening vaccination coverage," says Aditi Nayar, chief economist, ICRA.

In ICRA's assessment, there has been a shift in demand towards contact-intensive services from discretionary consumer goods for the mid-to-higher income groups. This, in conjunction with the emerging cautiousness in export demand, and the impact of high commodity prices on volumes as well as margins for the industrial sector, are likely to result in a relatively moderate industrial growth.

"The impact of the heat wave on the wheat harvest is expected to result in a low growth of the agricultural sector in Q1 FY2023. Overall, ICRA expects GDP growth in Q1 FY2023 to trail the 16.2% projected by the Monetary Policy Committee (MPC)," says Nayar.

The recent moderation in commodity prices, Nayar adds, if sustained, should help to ease inflationary as well as margin pressures and translate into improved demand for discretionary goods and higher value-added growth, respectively. Based on this, ICRA anticipates that GDP growth in Q2 FY2023 may print in the range of 6.5- 7.0%, exceeding the MPC’s forecast of 6.2% for that quarter.

The recovery in travel-related services has been upbeat since the onset of FY23, benefitting from pent-up demand related to corporate travel and increasing confidence for availing leisure services amid the decline in trajectory of Covid-19 infections.

Within transportation, the railway and road sub-sectors are expected to post a healthy recovery in Q1 FY2023, as indicated by the healthy YoY growth in rail freight and GST e-way bills, says ICRA.

Overall, ICRA expects the growth in GVA of trade, hotels, transport, communication and services related to broadcasting to record a base-effect driven expansion of around 40-45% in Q1 FY2023, while trailing the pre-Covid level of Q1 FY20 by a muted 2.5%.

The spike in global commodity prices, following the escalation of the Russia-Ukraine conflict for a larger part of the quarter, is expected to have compressed demand for discretionary goods as well as the margins of corporates, thereby impacting the value-added growth.

The central government’s capex, infrastructure and construction output and new project announcements showed encouraging trends in Q1 FY23, along with a robust order book position of construction and capital goods companies and the resilience in housing sales, as evinced by stamp duty collections, according to ICRA.

However, project completions, states’ capex and capital goods’ output were subdued, suggesting that the recovery in investment demand remained uneven, it says.

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