India’s GDP growth accelerated sharply to 6.1% YoY in Q4 FY23 from 4.5% YoY in Q3, performing stronger than market expectations (Refinitiv: 5.0%). The upturn in headline growth was primarily driven by pent-up demand for services, healthy run-rate for investment growth, improvement in net exports, and robust capex-oriented government spending.

Sequentially, GDP expanded by a robust 8.4% QoQ, better than the pre pandemic average (over a 5-year period) of 6.3% observed in Q4. This sequential expansion is in sync with the signals derived from most high frequency indicators in Q4 FY23, such as PMI manufacturing, GST revenue collections, E-way bills, tractor sales among others – many of which were at multi-month high.

Key highlights

• Investment expanded at the fastest pace in 10-quarters by 20.8%QoQ in Q4 FY23, significantly better than the pre-pandemic seasonal average (over a 9-year period) of 7.3% observed in Q4. This is on account of the continued thrust on public capex by the government.

• Private consumption momentum retreated to negative territory after a gap of two quarters to contract by 3.2% QoQ in Q4 FY23, but was broadly in line with the pre-pandemic seasonal average (over a 9-year period) of -3.1% observed in Q4. On annualized basis, private consumption improved marginally to 2.8% in Q4 FY23 from 2.1% in Q3 FY23. While performance of high frequency proxy indicators had underscored an improving consumer sentiment/demand, there appears to have been a stronger than anticipated offsetting by financial tightening and subdued recovery in rural consumption on account of elevated farm input inflation and erratic rainfall.

• Government consumption growth returned to positive territory after a gap of two quarters to expand by 2.3% YoY in Q4 FY23 from a contraction of 0.6% YoY in Q3 FY23. This reflects the improving pace of disbursal of revenue expenditure along with a persistent focus on capex.

•  Net export ratio, based on current prices, improved to -1.6% of GDP in Q4 FY23 from -4.0% in Q3 FY23 on account of relatively faster pace of moderation in demand for merchandise imports during Q4 amidst strong performance by services exports.

• On the supply side, annualized growth in headline GVA rose to 6.5% YoY in Q4 FY23 from 4.7% in Q3. The improvement was broad-based across agriculture, services, and industry. Despite higher than normal temperature in Feb-23 followed by erratic rainfall in Mar-23, agriculture and allied sector growth rose to a 12-quarter high of 5.5% YoY in Q4 FY24 compared to 4.7% in Q3.  It is likely that an upward revision in government’s third advance estimate of foodgrain production in FY23 drove this.

• Industry GVA accelerated by 6.3% YoY in Q4 FY23 from 2.3% YoY in Q3. Expansion was driven by Construction, Mining and Utilities sector.

•  Within Industry, manufacturing growth returned to positive territory after a gap of two quarters to expand by 4.5% YoY in Q4 FY23 from a contraction of 1.4% in Q3, likely supported by easing global commodity prices.

• In case of services, growth improved to 6.9% YoY in Q4 FY23 compared to 6.1% in Q3 FY23. The improvement was primarily driven by the sectors of - Financial services, real estate etc. and Public administration services, while growth in Trade, hospitality and communication sector witnessed a marginal moderation.

Outlook

The robust pace of economic activity in Q4 FY23 has meant an upward revision to FY23 GDP growth, which is now estimated at 7.2%, higher than NSO’s previous estimate of 7.0%. Acceleration in growth momentum is comforting despite global banking sector turmoil that came to the fore in the quarter, along with continued tightening of financial conditions, slowdown in global demand and geopolitical uncertainties. Government capex is continuing as a strong pillar of support, pushing investment ratio to 31.7% of GDP in Q4 FY23, the highest level in almost 9-years.

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

• In its latest update to the World Economic Outlook report, the IMF predicts World GDP growth to moderate to 2.8% and 3.0% in 2023 and 2024 respectively from 3.4% in 2022.

• Urban consumption, which is still performing relatively better, is likely to show some fatigue as pent-up demand wanes and transmission of cumulative past rate hikes by RBI’s is completed. The pace of annualized growth of credit to consumer durables has moderated over the last 2-3 quarters.

• In addition, downside risks emanate from possibility of El Nino weighing on Southwest monsoon performance which could dampen rural demand and agriculture growth.

Having said so, the expected recovery in rural demand, persistent support from Government capex along with nascent signs of private capex taking shape are to be seen as growth anchors. Overall, we maintain GDP growth forecast at 6.0% in FY24.

Says Suman Chowdhury, Chief Economist and Head-Research, Acuité Ratings & Research “As against our estimate of Q4GDP of 5.0%, the actual print indeed gave a pleasant surprise, coming at 6.1% YoY and significantly higher than the 4.4% YoY in Q3FY23. Overall, the GDP growth for FY23 stands at 7.2% as compared to the 7.0% reported in the advance estimates earlier.

What’s pleasantly surprising is the GVA growth of 6.5% in the last quarter and 7.0% for FY23. The agriculture sector has seen a higher growth of 4.0% than the 3.5% seen last year, despite the risks seen from untimely rainfall. The manufacturing sector was expected to record a relatively low GVA, and it printed 1.3% YoY, given the global headwinds. But the actual buoyancy in the growth has been driven by the services sector – construction sector at 10.0% and 14.0% YoY for trade and transport services;  exports of services have also seen a significant uptick in FY23. As expected, gross fixed capital formation grew by 8.9% in Q4 with all the push on public sector capital expenditure and a partial kickoff in the private sector space as well. 

The concern, however, remains on the demand side as private consumption has grown by 2.8% YoY only in the fourth quarter. This seems slightly inconsistent with the robust agricultural growth, but this may also imply that the rural demand may strengthen going forward provided the monsoon doesn’t throw any major surprises.

For the current year, we continue to forecast a growth of 6.0% given the expected impact of the global uncertainties and the lagged impact of the interest rate hikes in the domestic economy. Given the inflation numbers along with the weaker consumption data, we expect the MPC to stick to the ‘pause’ in rate action in the next 2-3 meetings.”

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

Chart 1: Government capex is continuing as a strong pillar of support, pushing investment ratio to 31.7% of GDP in Q4 FY23, the highest level in almost 9-years