India’s GDP growth in Q4 FY22 decelerated to 4.1% YoY from 5.4% in Q3. In contrast to the softness observed in annualized growth number, GDP expanded at a healthy rate of 6.7% QoQ, better than the pre pandemic seasonal average (over a 10-year period) of 5.9% observed in Q4.

Key highlights of quarterly data

• On YoY basis, the slowdown was predominantly on account of private consumption that eased to a subdued level of 1.8%, the slowest in 5-quarters. The temporary disruption from the Omicron wave seems to have had an adverse impact in this case (also corroborated by the production of consumer goods basket within IIP that saw a growth of -3.8% YoY in Q4 FY22 vs. -1.4% in Q3).
• There was however some offsetting impact from the traction in government consumption and investments. A seasonal improvement in net exports also played a supporting role.
• On the supply side, GVA growth too moderated to 3.9% YoY in Q4 FY22 from 4.7% in Q3. At a broad level, the moderation was on account of services, while industry and agriculture improved on the margin.
• We note that the manufacturing value add contracted (-0.2% YoY in Q4 FY22) for the first time since the first wave of Covid. Besides the impact of an adverse statistical base, this reflects the temporary disruption on account of Omicron and geopolitical uncertainty from the Russia-Ukraine conflict.

A cursory look at the annual data

With the release of Q4 data, the full year GDP growth in FY22 now turns out to be 8.7%, a marginal downward revision vis-à-vis the previous estimate of 8.9% provided in Feb-22. This nevertheless is the strongest growth performance in the current series and makes it stand out among key peer countries across DMs and EMs.

Having said so, one needs to juxtapose this in the backdrop of the pandemic shock that had resulted in a sharp GDP contraction of 6.6% in FY21 and the consequent statistical advantage. To get a comprehensive picture, one then needs to compare FY22 GDP levels with the pre pandemic GDP level in FY20. Here, we note that:

• FY22 GDP and GVA have surpassed their pre pandemic levels by 1.5% and 2.9% respectively.
• On the supply side, the post pandemic recovery has been led by manufacturing, which in FY22 stood 9.3% above its FY20 levels. On the demand side, the recovery was led by exports, which as of FY22 stood 12.8% above its FY20 levels.
• The post pandemic recovery is however not completely broad based. Contact intensive sectors bore the brunt of a series of lockdown restrictions particularly in Q1 and Q4, with value add in trade, hotels, transport, and communication services in FY22 turning out to be 11.3% lower vis-à-vis its pre pandemic levels in FY20. On the demand side, this gets captured by the lacklustre recovery in private consumption, which managed to exceed its pre pandemic levels by a meagre 1.4%.

Another highlight of the annual data is the spectacular growth in nominal terms – Nominal GDP registered an 11-year high growth of 19.5% in FY22, up from a contraction of 1.4% in FY21. This highlights the support derived from elevated inflation, which stood at 10.8% as per the GDP deflator in FY22, up from 5.2% in FY21.

FY23 GDP outlook

Going forward, FY23 GDP growth would moderate from a mix of inorganic and organic factors. On the inorganic side, the normalization of statistical disruptions to the GDP base that is underway, will continue. This would lower the headline growth number in FY23 and should be interpreted as a sign of normalization.

The recovery could nevertheless face risks from organic factors:

• The sharp rally in commodity prices and inputs costs for the industrial sector in the aftermath of the ongoing Russia-Ukraine war have started to dent producer margins as pass-through to consumers remains incomplete amidst subdued demand. The geopolitical crisis is also likely to prolong supply bottlenecks and act as an added dampener for the sector.
• The updraft in CPI inflation over Mar-22 and Apr-22 has triggered an earlier than envisaged monetary policy normalisation by the RBI. Earlier this month, RBI in an off-cycle meeting hiked the repo rate by 40 bps to 4.40% and curbed surplus liquidity via a 50 bps increase in CRR to 4.50%. Going forward, we expect the central bank to follow aggressive policy normalization and front load rate actions (incremental 75 bps hike in repo rate along with another 50 bps hike in reserve requirement) in the near term.
• The run-up in global commodity prices accompanied by tightening of financial conditions, along with Covid related uncertainties and slowdown induced in China, is likely to weigh on global economic activity. IMF expects global GDP growth to slow down by 80 bps to 3.6% in 2022 vs. its Jan-22 estimate, with a sharper deceleration of 100 bps on world trade volumes to 5.0%. This is likely to weigh on domestic export-oriented industries.
• The elevated and rising inflation has hastened the pace of monetary policy normalisation in major advanced economies could induce financial market volatility with spill overs on Emerging markets including India.

Nevertheless, growth is expected to find some support from prospects of normal monsoon, government’s focus on capital expenditure and progress in vaccination coverage

• Indian Meteorological Department (IMD) expects Southwest monsoon to be normal pegged at 103% of LPA (revised up from 99% earlier), with government setting the food grain production target of 328 mn tonnes for 2022-23 (3.8% higher vs. last year).
• Amidst progress on vaccination (~70% of the population receiving double dose) and as the economy emerges out of lockdowns, services sector, supported by pent-up demand, is likely to play a dominant role in FY23 GDP growth vis-à-vis manufacturing.
• Improvement in manufacturing capacity utilization to 72.4% in Q3 FY22 (higher than its pre pandemic level of 68.6% in Q3 FY20) corroborates the gradual easing of domestic supply side constraints and bodes well for future industrial activity.
• Capex focused government spending as per budget estimates; the government has incurred capital expenditure aggregating to Rs 5.93 tn in FY22 (prov) as compared to the budgetary estimate of Rs 5.54 tn. It has set a capex target of Rs 7.5 tn for FY23 and even if there are some slippages, the increase will be sizeable and support India’s economic recovery.
• Among the broad spectrum of lead indicators, most have continued to display incremental strength for months of Mar-22 and Apr-22. This was clearly captured in our inhouse proprietary AMEP (Acuité Macroeconomic Performance) index which registered its post-pandemic record high level in the month of Mar-22 (126.6) and Apr-22 (127.8).

As such, we expect GDP growth in FY23 at 7.2% albeit with moderate downside risk.

Table 1: India’s GVA and GDP: Sectoral break-upIndia’s GDP growth in Q4 FY22 decelerated to 4.1% YoY from 5.4% in Q3. In contrast to the softness observed in annualized growth number, GDP expanded at a healthy rate of 6.7% QoQ, better than the pre pandemic seasonal average (over a 10-year period) of 5.9% observed in Q4.

Key highlights of quarterly data

• On YoY basis, the slowdown was predominantly on account of private consumption that eased to a subdued level of 1.8%, the slowest in 5-quarters. The temporary disruption from the Omicron wave seems to have had an adverse impact in this case (also corroborated by the production of consumer goods basket within IIP that saw a growth of -3.8% YoY in Q4 FY22 vs. -1.4% in Q3).
• There was however some offsetting impact from the traction in government consumption and investments. A seasonal improvement in net exports also played a supporting role.
• On the supply side, GVA growth too moderated to 3.9% YoY in Q4 FY22 from 4.7% in Q3. At a broad level, the moderation was on account of services, while industry and agriculture improved on the margin.
• We note that the manufacturing value add contracted (-0.2% YoY in Q4 FY22) for the first time since the first wave of Covid. Besides the impact of an adverse statistical base, this reflects the temporary disruption on account of Omicron and geopolitical uncertainty from the Russia-Ukraine conflict.

A cursory look at the annual data

With the release of Q4 data, the full year GDP growth in FY22 now turns out to be 8.7%, a marginal downward revision vis-à-vis the previous estimate of 8.9% provided in Feb-22. This nevertheless is the strongest growth performance in the current series and makes it stand out among key peer countries across DMs and EMs.

Having said so, one needs to juxtapose this in the backdrop of the pandemic shock that had resulted in a sharp GDP contraction of 6.6% in FY21 and the consequent statistical advantage. To get a comprehensive picture, one then needs to compare FY22 GDP levels with the pre pandemic GDP level in FY20. Here, we note that:

• FY22 GDP and GVA have surpassed their pre pandemic levels by 1.5% and 2.9% respectively.
• On the supply side, the post pandemic recovery has been led by manufacturing, which in FY22 stood 9.3% above its FY20 levels. On the demand side, the recovery was led by exports, which as of FY22 stood 12.8% above its FY20 levels.
• The post pandemic recovery is however not completely broad based. Contact intensive sectors bore the brunt of a series of lockdown restrictions particularly in Q1 and Q4, with value add in trade, hotels, transport, and communication services in FY22 turning out to be 11.3% lower vis-à-vis its pre pandemic levels in FY20. On the demand side, this gets captured by the lacklustre recovery in private consumption, which managed to exceed its pre pandemic levels by a meagre 1.4%.

Another highlight of the annual data is the spectacular growth in nominal terms – Nominal GDP registered an 11-year high growth of 19.5% in FY22, up from a contraction of 1.4% in FY21. This highlights the support derived from elevated inflation, which stood at 10.8% as per the GDP deflator in FY22, up from 5.2% in FY21.

FY23 GDP outlook

Going forward, FY23 GDP growth would moderate from a mix of inorganic and organic factors. On the inorganic side, the normalization of statistical disruptions to the GDP base that is underway, will continue. This would lower the headline growth number in FY23 and should be interpreted as a sign of normalization.

The recovery could nevertheless face risks from organic factors:

• The sharp rally in commodity prices and inputs costs for the industrial sector in the aftermath of the ongoing Russia-Ukraine war have started to dent producer margins as pass-through to consumers remains incomplete amidst subdued demand. The geopolitical crisis is also likely to prolong supply bottlenecks and act as an added dampener for the sector.
• The updraft in CPI inflation over Mar-22 and Apr-22 has triggered an earlier than envisaged monetary policy normalisation by the RBI. Earlier this month, RBI in an off-cycle meeting hiked the repo rate by 40 bps to 4.40% and curbed surplus liquidity via a 50 bps increase in CRR to 4.50%. Going forward, we expect the central bank to follow aggressive policy normalization and front load rate actions (incremental 75 bps hike in repo rate along with another 50 bps hike in reserve requirement) in the near term.
• The run-up in global commodity prices accompanied by tightening of financial conditions, along with Covid related uncertainties and slowdown induced in China, is likely to weigh on global economic activity. IMF expects global GDP growth to slow down by 80 bps to 3.6% in 2022 vs. its Jan-22 estimate, with a sharper deceleration of 100 bps on world trade volumes to 5.0%. This is likely to weigh on domestic export-oriented industries.
• The elevated and rising inflation has hastened the pace of monetary policy normalisation in major advanced economies could induce financial market volatility with spill overs on Emerging markets including India.

Nevertheless, growth is expected to find some support from prospects of normal monsoon, government’s focus on capital expenditure and progress in vaccination coverage

• Indian Meteorological Department (IMD) expects Southwest monsoon to be normal pegged at 103% of LPA (revised up from 99% earlier), with government setting the food grain production target of 328 mn tonnes for 2022-23 (3.8% higher vs. last year).
• Amidst progress on vaccination (~70% of the population receiving double dose) and as the economy emerges out of lockdowns, services sector, supported by pent-up demand, is likely to play a dominant role in FY23 GDP growth vis-à-vis manufacturing.
• Improvement in manufacturing capacity utilization to 72.4% in Q3 FY22 (higher than its pre pandemic level of 68.6% in Q3 FY20) corroborates the gradual easing of domestic supply side constraints and bodes well for future industrial activity.
• Capex focused government spending as per budget estimates; the government has incurred capital expenditure aggregating to Rs 5.93 tn in FY22 (prov) as compared to the budgetary estimate of Rs 5.54 tn. It has set a capex target of Rs 7.5 tn for FY23 and even if there are some slippages, the increase will be sizeable and support India’s economic recovery.
• Among the broad spectrum of lead indicators, most have continued to display incremental strength for months of Mar-22 and Apr-22. This was clearly captured in our inhouse proprietary AMEP (Acuité Macroeconomic Performance) index which registered its post-pandemic record high level in the month of Mar-22 (126.6) and Apr-22 (127.8).

As such, we expect GDP growth in FY23 at 7.2% albeit with moderate downside risk.

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