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Q3 FY23 GDP: Steady but not strong

01 Mar 2023



  • India’s GDP growth decelerated sharply to 4.4% YoY in Q3 FY23 from 6.3% YoY in Q2, performing weaker than market expectations which were closer to 5%.
  • The downward slide in headline growth was primarily due to waning of favorable statistical base effect, the contraction in the manufacturing and the export sectors along with the lack of strength in domestic consumption demand.
  • Sequentially, we note that the GDP expanded by a robust 3.5% QoQ, better than the pre pandemic average (over a 5-year period) of 2.1% QoQ observed in Q3.
  • Services activity continues to outperform industrial activity and the run-rate for investment growth remains healthy, supported by capex-oriented government spending.
  • However, challenges for economic growth are expected to intensify in H2 FY23 and FY24 on the back of waning pent-up demand, persistence of tightness in global financial conditions, sluggish global demand, elevated geopolitical uncertainty and increasing interest rates.
  •  As such, we maintain our GDP growth forecast of 7.0% in FY23 and 6.0% in FY24. 

India’s GDP growth decelerated sharply to 4.4% YoY in Q3 FY23 from 6.3% YoY in Q2 FY23, performing weaker than market expectations (Refinitiv consensus: 4.7%). The downward slide in headline growth was primarily due to waning of favorable statistical base effect, contraction in manufacturing, decline in exports due to the global slowdown along with the lack of strength in rural consumption demand.

Nevertheless, sequentially, GDP expanded by a healthy 3.5% QoQ, better than the pre pandemic average (over a 5-year period) of 2.1% QoQ observed in Q3. This sequential expansion is in sync with the signals derived from most high frequency indicators in Q3 FY23, such as PMI manufacturing and services, generation of e-way bills, tractor sales among others.

Key highlights

  • Private consumption expanded by 7.3% QoQ, somewhat softer than the pre pandemic seasonal average (over a 5-year period) of 8.3% observed in Q3. Along with the impact from an adverse statistical base effect, the annualized growth in private consumption decelerated at a fast clip to 2.1%YoY. While performance of proxy indicators during the festive season indicated an improving consumer sentiment, they appear to have been offset by financial tightening and subdued recovery in rural consumption on account of elevated farm input inflation, weak wage growth, and erratic rainfall, to name a few.

  • Government consumption contracted for the second consecutive quarter by 0.8% YoY in Q3 FY23 from a sharper contraction of 4.1% YoY in Q2 FY23. This reflects slower but gradually improving pace of disbursal of revenue expenditure by states.

  • Although import of goods continued to outpace that of exports, the net export ratio improved to 2.4% of GDP in Q3 FY23 from 4.4% in Q2 FY23. This is on account of relatively faster pace of moderation in demand for merchandise imports during Q3 amidst strong performance by services exports.

  • On the supply side, annualized growth in headline GVA moderated to 4.6% YoY in Q3 FY23 from 5.5% in Q2. Agriculture and allied sector posted a strong expansion of 3.7% YoY compared to 2.4% in Q2.  despite the anticipated drag from lower kharif output due to erratic rainfall. It is likely that upside non-farm activities could have provided an offsetting impact during Q2.

  • Industry GVA returned to positive territory of 2.4% YoY in Q3 FY23 from a contraction of 0.4% YoY in Q2 FY23. Expansion was driven by Mining, Utilities, and Construction sector. The only weakling was manufacturing growth which remained in contraction for the second consecutive month. Uneven rainfall, high input cost inflation, weakness in merchandise exports, subdued rural demand, etc. seems to have weighed on manufacturing.  

  • In the case of services, growth moderated to 6.2% YoY in Q3 FY23 compared to 9.4% in Q2 FY23. The moderation appears broad-based.


The pace of economic activity in Q3 FY23 has fared rather well despite the headwinds although the 4.4% YoY print doesn’t reflect that resilience adequately due to the upward revisions in the base GDP figures of previous years. In fact, had it not been for revisions in past data, GDP growth for Q3 FY23 would have come at 5.1%. Also, the improvement in sequential activity is commendable despite heightened geopolitical uncertainty, tightening of financial conditions, and persistence of supply chain disruptions in certain commodities.

Having said so, challenges for economic growth are expected to intensify in FY24. 

  • The impact of moderation in global trade volume growth to 2.4% in 2023 from 5.4% in 2022 (IMF estimates) is likely to have an impact of India’s exports. Growth of merchandise goods, driven by manufacturing goods, is already on a downtrend over the last 3-4 months, although strength in services exports, estimated at a record high of USD 16.5 bn in Jan-23, offer comfort.

  • In its latest update to the World Economic Outlook report, the IMF does call for balance of risks being titled on the downside amidst still simmering Ukraine-Russia war, possibility of adverse health outcomes in China and tighter financial conditions globally.

  • Among other factors influencing growth, pace of private capex recovery could remain somewhat sluggish and uneven amidst global uncertainties. Urban consumption, which is still performing relatively better, may show fatigue as pent-up demand wanes and transmission of cumulative past rate hikes by the banks is completed.

  • Predictions of a heat wave in March ahead of the Rabi harvest and expectations of a below-normal monsoon this year due to El Nino heatwave can be a potential risk factor.

Having said so, an anticipated recovery in rural demand and continued support from Government capex are to be seen as growth anchors for the coming fiscal. Given the uncertainty on the global front and the impact of increased interest rates, however, we continue to anticipate GDP growth to moderate to 6.0% in FY24 from 7.0% (NSO’s estimate) in FY23.

Says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research “Overall, the Q3 GDP print has been largely in line with the trend that we have observed in our proprietary Acuite Macro Economic Performance (AMEP) index which has held on to the same levels since Nov-22 (after the festive activity). While there is a lack of momentum in rural demand and a weakness in exports, it is partly offset by the steady demand for goods and services in the urban economy. With some support from the base factor, this will help the economy to notch up a print close to 7% in FY23. Going ahead into next fiscal however, the factors that will play an important role are the impact of higher interest rates on urban demand, the stability of the monsoon and the absence of the base factor; we have kept our GDP growth forecast for FY24 at 6.0% for now without factoring in any additional risks from monsoon and external factors.”

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

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

*PFCE – Private Final Consumption Expenditure reflecting domestic demand

*GFCF – Gross Fixed Capital Formation reflecting investment demand