As per First Advance Estimates (AE) of National Income released by National Statistical Organisation (NSO), India’s real GDP and GVA growth for FY23 are projected at 7.0% and 6.7% respectively. While the projected GDP growth stands a tad higher than that of RBI, it is in line with the existing forecast of Acuité Ratings which remains pegged at 7.0%.

Headline messages

• FY23 estimated growth marks an expected deceleration vis-à-vis 8.7% and 8.1% of real GDP and GVA growth clocked in FY22 – a year marked by onset of post pandemic recovery and further aided by a favourable base.

• Nominal GDP, which becomes a critical input for Budget arithmetic, is projected at Rs 273.1 lakh cr – translating into annualised growth of 15.4% compared to 19.4% in FY22. Against the budgeted growth of 11.1%, this growth upside gives the Government an added fiscal headroom of nearly Rs 95000 cr in FY23 (or 30 bps cushion to FY23 fiscal deficit to GDP ratio of 6.4%).

• With H1 FY23 GDP growth estimated at 10.7%YoY, the First Advance Estimates imply a growth of 4.5% in H2 FY23. This marks a sharp slowdown – an outcome primarily due to a wind down of the earlier favourable statistical base, even as incremental quarterly growth momentum remained resilient in Q3 FY23 amidst reopening dynamics and festive season support.

Granular highlights

• On the sectoral side, the slowdown in FY23 has been led by industry, of which mining and manufacturing played an outsized role. After clocking a robust double-digit value-added growth of 10.4% in FY22, industry is projected to slow down to 4.1% in FY23. Weighing on the headline industry growth, mining and manufacturing are expected to decelerate to 2.4% and 1.6% respectively.
• On the other hand, cushioning the downside, growth in electricity & utility services is estimated to improve to 9.0% from 7.5% in FY22, while construction is expected to hold ground at 9.1% compared to 11.5% in FY22.
• Agriculture sector is projected to grow at a 3-year high of 3.5% compared to 3.0% in FY22, premised on a healthy start to rabi sowing.
• Services are expected to outperform industry in FY23, benefitting from complete reopening of the economy. Growth in the sector is estimated at 9.4% in FY23, further building on the 8.4% expansion recorded in FY22. Expectedly, sub-sector of Trade, hotels, transport and communication which comprises of several contact-intensive services leads the charge with projected double-digit expansion of 13.7% in FY23, outpacing its own growth of 11.1% recorded in FY22.
• Weighing on services, growth in public administration, defence and other services is estimated to slow to 7.9% from 12.6% in FY22.
• On the expenditure side, the expected slowdown in investment growth to 11.5% in FY23 from a decadal high of 15.0% in FY22, also weighs on the headline GDP growth along with net exports.
• Consumption in FY23, i.e., combining both private and government, is projected to expand at the same pace of 7.0% recorded in FY22. While private consumption is estimated to see marginal downside from 7.9% in FY22 to 7.7% in FY23, it is set to be completely offset by an uptick in Government consumption.
• Net exports, amidst strength in domestic demand and in turn imports along with weakening global demand, is estimated to shave off 2.3% of GDP in FY23.

Outlook

Looking back, FY23 has been a fairly challenging economic year amidst lingering geopolitical uncertainties, aggressive global monetary policy tightening, commodity price flare-up in H1-2022 and growing echoes of an impending global slowdown in H2-2022. Against these global headwinds, domestic economy activity continued to hold on to its strength, gaining from a fully reopened economy and the first normalised festive season in 3 years that particularly supported the services sectors i.e. trade, transport and hospitality.    

Numerically, FY23 was also the year, when Covid induced loss in economic output was fully recovered. Estimated headline GDP for FY23, stands 8.6% above pre-Covid levels of FY20, with a broad-based recovery seen across all sub-sectors. Having said so, recovery still has an uneven characteristic, as underscored by FY23 Trade, Hotels, Transport and Communication services GVA projected to be a meagre 0.8% above FY20 levels.

Recall, first advance estimates of GDP are based on extrapolation of limited data available for the first 7-8 months of the fiscal year.

We believe that there could be a marginal downside to NSO’s GDP estimate of 7.0% on two fronts –

• Global growth slowdown will have a more material impact on domestic growth impulse in Q4 FY23
• Along with the lagged impact of domestic monetary policy tightening seen in FY22 playing catch-ups

Nevertheless, we have held on to our FY23 GDP growth forecast of 7.0% given the robust recovery in the service sector and the headwinds from a further growth in capital expenditure in H2FY23.

Table 1: India’s GVA and GDP: Sectoral break-up