India’s economic growth slowed to a three-quarter low of 4.4% in October-December 2022 (Q3FY23), with manufacturing remaining in the doldrums and key services industries registering sequential loss in growth momentum, according to data released by the National Statistical Office (NSO) on Tuesday.
Private consumption, the largest constituent of the gross domestic product (GDP), witnessed a rapid decline since the pent-up demand-driven resurgence in the June quarter (Q1) and investment recovery in the current fiscal has been modest and its endurance doubtful, the data revealed.
In the second advance estimates of national income, the NSO retained the FY23 growth at 7% seen in the first but undertook significant revisions of the estimates for FY20, FY21 and FY22.
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The real GDP growth in the last fiscal is now estimated at 9.1% compared with the earlier estimate of 8.7%. The growth contraction in the pandemic-hit FY20 is now re-estimated at -5.8% (-6.6%), while the rate of expansion of GDP in FY20 has been revised to 3.9% (3.7%).
Put simply, the cumulative average real GDP growth rate between FY20, the pre-pandemic year, to FY23 is now seen at 3.2%.
After all revisions, the nominal GDP in the current fiscal is now pegged at `272.04 trillion, slightly lower than the first advance estimate of `273.07 trillion, and up 15.9% on year (15.4%). This would mean the fiscal deficit for the year will be slightly higher at 6.45% compared with 6.42% in the revised estimate (RE), if deficit in absolute term is the same as the respective RE.
The latest data barely removes the uncertainty or pessimism over the growth momentum, though the growth compared with the respective pre-Covid level was higher in Q3 compared with Q2.
There aren’t much growth drivers around other than the promise of sustained capex momentum by the Centre and companies owned by it and a modest consumption booster from the tax reliefs to the middle class in the Budget.
Even the state governments slowed the capex pace in H1 and the jury is out on whether they will press the pedal in the second half. Merchandise exports contracted for the third time in four months in January and the finance ministry in a recent review admitted the shipments might show tepid growth in the short term, “as the major export markets of India are forecast to decline sharply in 2023”.
Given the spike in retail inflation to a three-month high of 6.52% in January and the stickiness of “core inflation”, the Reserve Bank of India (RBI) is widely expected to go for another round of rate hike in the current cycle, even as the repo rate is already at 6.5%.
Though there are indications that the recession in advanced economies will be milder than perceived earlier – there was a steadying of global economic activities in February after seven months of decline going by the S&P PMI surveys – the geopolitical uncertainties persist. While agriculture has been a bright spot in the economy for quote some time, there are some concerns now about the winter crop with possible heatwave conditions adversely impacting the standing wheat and horticulture crops.
Banking liquidity continues to stay in deficit and there are signs of a slowing of credit growth. G-Sec yields have risen steadily in line with the US treasury yields and the uncertainty on the economic front has led to inversion of the bond yield curve.
Growth in Gross Value Added (GVA) in Q3FY23 is pegged at 4.6%, higher than the GDP rate, because of higher subsidy releases in the quarter. Private final consumption expenditure (PFCF) grew just 2.1% on year in Q3. Gross fixed capital formation (GFCF) grew 8.3% on year in the quarter, thanks also to a low base (1.2%), and its share in GDP declined from 34.7% in Q1 to 31.8% in Q3. The government, mindful of fiscal strains, curbed its spending too, reporting negative year-on-year growth rates in government final consumption expenditure (GFCE) in both Q2 (-4.1%) and Q3 (-0.8).
DK Srivastava, chief economic adviser at EY India, noted: “In the first advance estimates, the contribution of net exports to real growth was -2.8% points. This has improved by nearly 1% point to -1.9% points (in the second advance estimates). This was counterbalanced by a fall in the domestic demand components, especially in private and government consumption expenditure. Thus, domestic demand appears to have weakened relative to the earlier estimate.” He added that pandemic has caused a reduction of nearly 4 percentage points as compared to the potential growth of 7%.
Aditi Nayar, chief economist and head – research & outreach at Icra, said: “Given the normalising base, in our assessment, growth relative to the respective pre-Covid quarter is a more meaningful metric than the y-o-y expansion. Growth relative to the pre-Covid level rose quite appreciably to 11.6% in Q3FY23 from 9.4% in Q2FY23, indicating an improved, albeit stubbornly uneven, recovery.”
Among sectors “trade, hotels, transport & communications services” posted the sharpest growth in the third quarter of the fiscal with GVA rate of 9.7%. However, sequentially, the growth in the segment has slowed down – from 25.7% in the first quarter and 15.6% in the second quarter. Analysts, however, noted that there remained pent-up demand in contact intensive sectors with normalisation of economic activities after the pandemic and the sector may be a key growth driver even in the next fiscal.
With the government’s focus on capital expenditure and investments in infrastructure along with a low base helped the construction sector grow 8.4% in the third quarter of the fiscal as against 5.8% in the second quarter. The sector had grown by 0.2% in the third quarter of FY22. “Electricity, gas, water supply and other utility services” also registered a robust 8.2% growth in the October to December 2022 quarter compared to 6% growth in the previous quarter.
However, the manufacturing sector continued to disappoint with a 1.1% contraction in the third quarter, although the contraction was milder than 3.6% in the second quarter. “The major disappointment is negative growth in manufacturing which can be attributed to weak profit and loss accounts of this sector. The second quarter results did indicate a fall in profits due to high input costs,” said Madan Sabnavis, chief economist, Bank of Baroda. The sector is likely to see more pressure amid slowing global growth and a fall in exports.
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With a good kharif crop, the farm sector grew at its fastest pace this fiscal in the third quarter at 3.7% as against a growth of 2.5% and 2.4% in the first and second quarters of the fiscal, respectively.
Manufacturing growth for the whole of FY23 is seen at a flat 0.6%. The growth rates of the three expenditure components for the year are seen at 7.3% (PFCF), 11.2% (GFCF) and 11.2% (GFCE).
India Ratings economists Sunil Sinha and Paras Jasrai said that the overall industrial growth continued to languish in the third quarter with just 2.4% growth after a negative 0.4% growth in the second quarter of the fiscal. “Services, the largest component of GDP, recorded a y-o-y growth of 6.2%. Some of its segments which were severely dented for being contact-intensive and were not showing signs of revival in FY22 have also begun to show growth momentum,” they said in a note.
On the production side, the growth for agriculture and manufacturing has been revised downwards for FY23, while that for mining and quarrying, “trade, hotels etc,” and financial services has been revised upwards.