- 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
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.
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.
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
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.
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.
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.
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
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)
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