- India’s GDP growth albeit healthy, decelerated sharply to 6.3% YoY in Q2 FY23 from 13.5% in Q1. The downward slide in headline growth was broadly along expected lines due to the absence of favorable statistical base effect in Q2, that had provided a strong boost to Q1 data.
- Sequentially, GDP expanded by a strong 3.6% QoQ, better than the pre pandemic seasonal average (over a 10-year period) of 0.6% observed in Q2.
- Despite a strong outturn for H1 FY23, challenges for economic growth are expected to intensify in H2 FY23 and FY24 on the back of persistence of tightness in global financial conditions, sluggish global demand, and elevated geopolitical uncertainty.
- Nevertheless, we also acknowledge likelihood of tailwinds from agricultural production, capex-oriented government expenditure, residual festive season activity and further play out of festive demand as well as moderation in international commodity prices.
- As such, we maintain our FY23 GDP growth forecast at 7.0% with moderate downside risks.
India’s GDP growth in Q2 FY23 albeit healthy, decelerated
sharply to 6.3% YoY from 13.5% in Q1 FY23. The downward
slide in headline economic growth was broadly along expected lines (market
consensus: 6.2%) due to the absence of favourable statistical base effect in
Q2, in contrast to the significant boost it provided to Q1 data given the
second Covid wave lockdown last year.
Sequentially, GDP expanded by 3.6% QoQ, better than
the pre pandemic seasonal average (over a 10-year period) of 0.6% observed in Q2. This sequential expansion is in sync with the signal
derived from other leading activity indicators, including our monthly Acuite
Macroeconomic Performance Index (AMEP). The average value of the index
which is based on sixteen high frequency indicators had grown by 12.7% in
Q2FY23 as compared to Q2FY22.
Our observations will emphasize on the quarterly
sequential momentum as YoY comparison will carry a significant statistical
noise. Detailed YoY data is provided in the table below for comparison.
consumption expanded by 1.0% QoQ, better than the pre pandemic seasonal average
(over a 10-year period) of -0.8% observed in Q2. This appears to have been led
by urban consumption (reflected in PV sales, air travel, credit card spend,
etc.). Rural consumption recovery has been subdued in comparison on account of
high farm input inflation, weak wage growth, and erratic rainfall, to name a
consumption contracted by 18.9% QoQ, in contrast to the pre pandemic seasonal
average (over a 10-year period) of 10.5% expansion observed in Q2. This
reflects slower pace of disbursal of revenue expenditure. Excluding interest
payments and subsidy disbursals, central government’s revex contracted sharply
by 22.6% QoQ. Although additional expenditure commitments have increased during
the course of the year (predominantly on account of food and fertiliser subsidies),
the central government appears to be keeping a lid on other forms of
consumption expenditure to mitigate overall fiscal risks.
import of goods outpacing that of exports, the net export ratio deteriorated to
-8.6% of GDP in Q2 FY23 (the widest in over 9-years), from -8.1% in Q1. This is
in line with the increase in monthly merchandise trade deficit during Q2 amidst
healthy domestic demand and lagged impact of higher commodity prices.
- On the
supply side, headline GVA depicted a similar trend. Annualized growth decelerated
sharply to 5.6% YoY in Q2 FY23 from 12.7% in Q1. In contrast, GVA expanded by
1.9% QoQ in Q2 FY23, better than the pre pandemic seasonal average (in the new
data series with 2011-12 as base) of -0.3% observed in Q2.
and allied sector posted a surprisingly strong expansion of 4.6% YoY, a 10-quarter
high. This strong performance is despite the anticipated drag from lower kharif
output. It is likely that non-farm activities could have provided a strong
offsetting impact during Q2.
GVA contracted by -3.1% QoQ, worse than the pre pandemic seasonal average (in
the new data series with 2011-12 as base) of -1.8% observed in Q2. Barring
construction, sequential weakness was broad based across mining, manufacturing,
and utilities sector. Uneven rainfall, high manufacturing input inflation,
weakness in export linkages, subdued rural demand, etc. seems to have weighed
on industrial sector.
contrast, services GVA turned out to be the mainstay with robust expansion of
8.7% QoQ compared to the pre pandemic seasonal average (in the new data series
with 2011-12 as base) of 4.7% observed in Q2. The combination of pent-up demand,
pre festive season activity, and traction in IT exports seems to have provided
strong support, esp. to Trade, Hotels, Transport, and Communication Services.
Cumulatively, GDP growth in H1 FY23
has come at a robust level of 9.7% YoY. Although favorable statistical base
effect has an important role to play here, pick-up in sequential activity is
commendable despite heightened geopolitical uncertainty, tightening of global
financial conditions, and persistence of supply chain disruptions in certain
commodities, highlighting the resilience in the domestic economy.
Having said so, challenges for
economic growth are expected to intensify in H2 FY23 and FY24.
some paring of expectations with respect to the pace of rate hikes by major
central banks, monetary policy rates could remain higher for longer. In case of
US, the Federal Reserve in its upcoming review in Dec-22 is expected to
telegraph a higher terminal rate projection of 5.00-5.25% compared to the
earlier level of 4.50-4.75% provided in Sep-22.
could imply persistence of tightness in global financial conditions.
- In its
latest update to the World Economic Outlook report, the IMF slashed its growth
forecast for 2023 World GDP and World Trade by 20 bps and 70 bps to 2.7% and
2.5% respectively - this marks a sharp loss of momentum vis-à-vis IMF’s 2022
growth estimates of 3.2% and 4.3% for world economic growth and global trade.
anticipated slowdown in global demand has already started to manifest in
weakness in India’s merchandise exports that for Oct-22, posted its first annualized
contraction in 20-months.
geopolitical uncertainty could further dampen sentiment and global demand.
Going forward, as the favorable
statistical effect tapers, headline GDP growth would decelerate in the coming
quarters. However, incremental support would nevertheless come from:
season support to private demand, esp. in Q3 FY23. This would get additional
support from moderation in inflation and bonus pay-outs and expected hike in
dearness allowance for government employees.
harvest in Q3 FY23 would offer support to agriculture output and farm incomes. The
healthy pick-up in rabi sowing (up 24.1% YoY as of Nov 25th) bodes
well for farm incomes in subsequent quarters.
oriented public expenditure continuing to offer good quality fiscal impulse,
which would likely benefit manufacturing capacity utilization further. For H1
FY23, central government capex spending rose by nearly 49.5% YoY to mark the
fastest pace on record.
in global commodity prices (CRB index is ~15% lower vis-à-vis Jun-22 peak)
would support producer profit margins, and their gradual pass-through would
boost consumer sentiment.
We expect the downside and upside
risks to be broadly balanced in the coming quarters. As such, we continue to
maintain our FY23 GDP growth forecast of 7.0%.
Table 1: India’s GVA and GDP: Sectoral break-up