Domestic ratings agency Icra on Tuesday cut its FY23 real GDP growth estimate by a sharp 0.8 per cent to 7.2 per cent, primarily driven by the fallout of Russian invasion of Ukraine.

Its chief economist Aditi Nayar attributed the downward revision to elevated commodity prices and also fresh supply chain issues arising from the conflict in Ukraine.

It can be noted that the Reserve Bank expects FY23 GDP growth rate at 7.8 per cent. The central bank is set to come out with the first bi-monthly monetary policy for next fiscal year in early April, when it will revisit the number.

Real GDP growth is likely to moderate to 3-4 per cent in Q4FY22 from 5.4 per cent in Q3FY22, which will lead to FY22 real GDP growth rate at 8.5 per cent.

As expected, the third wave had a much smaller impact on confidence levels relative to the first two waves. While the early data for March 2022 is mixed, the Russia-Ukraine conflict and the associated surge in commodity prices has heightened uncertainty, and the expected margin compression is likely to squeeze GVA growth, it said.

"Higher prices of fuels and items such as edible oils are likely to compress disposable incomes in the mid to lower income segments, constraining the demand revival in FY23," Nayar said.

Welcoming the extension of the free foodgrains scheme till September 2022, she said it will offer some respite to the food budgets of vulnerable households, while in the mid to upper income households, a normalisation of behaviours after the third wave will drive consumption towards the contact-intensive services that were avoided during the pandemic.

Exports of some items will ?rise to meet global demand amid the supply crunch, and the capacity utilisation levels will rise to 74-75 per cent in Q3 FY23 from 71-72 per cent in Q4 FY22, the agency said, adding ?this can lead to a "modest delay" in the much awaited broad-basing of capacity expansion by the private sector.

An early kick-off of the Centre's budgeted capex programme remains crucial to boost investment activity in first half of FY23, the agency said.

"However, a concern is that the execution risk is shifting to the states, with a considerable portion of the step-up in the GoI's budgeted capital spending coming through the enlargement in the size of interest-free capex loan to the state governments to Rs 1 lakh crore in FY23 from Rs 15,000 crore in FY22," it added.

Nayar said the protracted geopolitical tensions and high commodity prices pose downside risks to the growth outlook, with margin compression set to squeeze the growth of the gross value added (GVA) during the period of the conflict.

“Moreover, the K-shaped recovery appears likely to continue with the formal sector gaining market share in FY23," she said, warning that the concerning socio-economic trend will continue.

The agency feels healthy reservoir levels offer insurance against a potentially below normal rainfall in 2022, but as economic activity normalises, there could be a shift in the availability of agricultural labour across different regions, affecting acreage in some states, which has been the key driver of agri output during FY21 and FY22.

Inadequate availability of fertilisers also poses a concern for the farm sector, it said, pointing out that systemic inventory is significantly below historic levels across all segments of fertilisers chiefly on account of lower imports amid limited availability in the international market, and elevated prices.

So, even with a normal monsoon and healthy reservoir levels, acreage, output may not rise meaningfully in FY23, constraining agricultural GVA growth below 3 per cent, the ratings agency said.