India’s GDP growth in Q1 FY23 accelerated sharply to 13.5% YoY from 4.1% in Q4 FY22. While the spring in annualized growth is impressive prima facie, the actual print is around 2.0% lower than market expectations.

Further, the sequential momentum also appears soft with GDP contracting by 9.6% QoQ, worse than the pre pandemic seasonal average (over a 10-year period) of -4.6% observed in Q1. A weak seasonally adjusted print coupled with a high annualized growth number underscores the role of a favorable statistical base in the headline GDP.

Key highlights

• Private consumption and investments recorded a robust annualized growth print of 25.9% YoY and 20.1% YoY respectively. Complete unlocking of the economy (especially relevant for pent-up demand for contact intensive services) post the Omicron wave, high vaccination coverage, and central government’s continuing capex push are likely underlying drivers behind these strong outturns.
• Government consumption decelerated to 1.3% YoY from 4.8% in Q4 FY22. This predominantly reflects slower pace of disbursal of revenue expenditure (ex-interest payments).
• While exports (of goods and services) posted a mild moderation, imports surged ahead, backed by recovery in domestic demand. This is also corroborated by the monthly trade deficit numbers, that created a record high in Q1 FY23.
• On the supply side, headline GVA depicted a similar trend. The annualized growth jumped sharply to 12.7% YoY even as the seasonally adjusted sequential momentum turned out to be soft.
• Agriculture and allied sector posted a surprisingly strong expansion of 4.5% YoY, a 9-quarter high. It is likely that the heat wave related crop damages would have got compensated by a pickup in allied activities.
• Industry GVA posted a strong growth of 8.6% YoY, up from 1.3% YoY in Q4 FY22 amidst robust pickup in utilities and construction sectors.
• Services turned out to be the mainstay with robust growth seen in the sectors of Trade, Hotels, Transport, Communication & Broadcasting (25.7% YoY), and Public Administration, Defence & Other Services (26.3% YoY).
• With this, the GVA growth in services has outpaced that in industry for four consecutive quarters with the gradual normalization of domestic mobility.

Outlook

The combination of favourable statistical base, complete unlocking of economic activity, spill-over of pent-up demand, and high vaccination cover helped India to post a double-digit expansion in Q1 FY23 GDP. This indeed appears commendable amidst the current backdrop of global headwinds namely heightened geopolitical uncertainty, tightening of global financial conditions, and persistence of supply chain disruptions in certain commodities.

Going forward, as the favourable statistical effect tapers, headline GDP growth would clearly decelerate in the coming quarters. However, incremental support would nevertheless come from:

• The festive heavy H2 FY23 in combination with pent-up demand (esp. for services) and further traction in vaccination coverage would drive domestic demand recovery. Expectation of moderation in inflation, along with likely bonus pay-outs and expected hike in dearness allowance for government employees, could further support discretionary consumption.
• At an aggregate level, kharif harvest beginning late Sep-22 onwards would offer support to agriculture output and farm incomes.
• Capex oriented public spending continues to offer the much-needed fiscal impulse, and would hopefully benefit manufacturing capacity utilisation further, which has recovered to above pre-pandemic levels, at 74.5% as of Mar-22.
• The recent moderation in global commodity prices, with the CRB index nearly 11% lower vis-à-vis Jun-22 peak will offer reprieve to producers, and the likely pass-through to consumers (with a lag) would support consumer sentiment.

Having said so, we also acknowledge growing downside risks to our FY23 GDP growth estimate of 7.5% on account of:.

• Disruption in rice acreage on account of uneven rainfall distribution, especially in states of Uttar Pradesh, Bihar, Jharkhand, and West Bengal.
• More importantly, buildup of adverse global factors (like tightening of global financial conditions, elevated geopolitical uncertainty, etc.) would constrain external demand significantly in H2 FY23. The IMF in its Jul-22 World Economic Outlook update had slashed its 2022 global growth forecast by 40 bps to 3.2% and trade volume growth by 90 bps to 4.1%.
• Likelihood of government resorting to some degree of back-loaded expenditure rationalization in order to stick to the FY23 fiscal deficit target of 6.4% of GDP.

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