Helped by strong growth in contact-intensive services and the farm sector, India’s gross domestic product (GDP) expanded by 6.3% in the September quarter, the National Statistical Office (NSO) said on Wednesday.
The headline number, adversely impacted by a normalising base, was the same as predicted by the RBI in its latest monetary policy statement.
The data, however, revealed a gradual fizzling out of a consumption binge seen after the ebbing of the pandemic and inadequate support from private-sector capital expenditure. Also in evidence is a persisting weakness on the manufacturing front – the sector shrank 4.3% on year in Q2FY23 and hardly grew even in comparison to Q2FY21.
The GDP was also boosted by strong growth in indirect tax collections particularly of the Goods and Services Tax (GST), which itself is aided in good measure by elevated inflation. The gross value added (GVA), which is a more accurate yardstick of the state of the economy, grew at a much lower rate of 5.6% in September quarter.
The economy is seen to have slowed further in aggregate terms after the first half of the current fiscal, primarily because of a sharp slowdown in exports amid global headwinds, which would have increased the drag of (negative) “net exports” on the national income. A further weakening of consumption in the lower income strata is also being noticed, even as the pent-up demand is fast draining out.
Data released separately revealed that the combined output of eight core industries grew at a flat 0.1%, a 20-month low, in October against 8.7% in the year-ago month and 7.8% in September.
The government promptly pitched in to minimise the growth deceleration – Budget capex rose 24% in September and 59% in October after flat-to-negative levels in the previous three months. In October, the Budget capex grew 176% and revenue spending, 44%. Investments by government entities like the NHAI, Railways and the Central PSEs are also going on in a brisk pace, although capex by state governments has lost some momentum.
Finance minister Nirmala Sitharaman said on Wednesday in an event organised by a news agency that the growth rate would be sustained through more government capital spending. “We would continue to push capital expenditure, and that I’m saying even as I’m preparing for the next (FY24) Budget,” Sitharaman said. “We are well on course on meeting this year’s (capex) target. The states have shown extraordinary absorption capacity for taking the monies and spending on capital assets,” the minister said.
Nominal GDP against which key Budget numbers are benchmarked, grew as much as 16.2% in the second quarter of FY23 to Rs 65.31 trillion, thanks to elevated price pressure in the economy. It will help inflate the base for the calculation of FY23 fiscal deficit.
Negative net exports continued to weigh down GDP growth in the September quarter. While growth in merchandise exports slowed down in Q2, imports continued to rise at a much steeper pace. The share of exports (both goods and services) in GDP rose to 23.2% in real terms in the September quarter from 21.8% a year ago but that of imports spiked to 29.1% from 24.2%. Net imports, in fact, doubled in Q2 from a year before. With a demand slowdown in its key markets, merchandise exports are expected to drop in the third quarter, exacerbating the pulldown effect of net exports on the GDP.
Discrepancies hit a 10-quarter high in the second quarter, which indicates significant revisions in the sectoral growth estimates. Despite a delay in kharif sowing, the farm sector is holding up, but there is little evidence this is commensurately driving up rural income.
As for the individual sectors, the Q2 gross value added (GVA) growth rates were as follows: Agriculture, forestry and fisheries: 4.6%, mining and quarrying: (-)2.8%, construction: 6.6%, trade, hotels, transport, communications etc: 14.7%, financial, real estate and professional services: 7.2% and public administration, defence etc.: 6.5%.
Icra chief economist Aditi Nayar said the unexpected contraction in manufacturing seems to reflect the impact of high input prices on margins in certain sectors. “Services stood out as the clear driver of growth in Q2FY23, accounting for 5.3% of the 5.6% GVA growth in this period, with even the pandemic-scarred trade, hotels, transport, communication sub-segment surpassing its Q2 FY20 performance.”
On the expenditure side, private consumption expenditure grew 9.7% in Q2 as against 10.5% in the year ago quarter and fixed capital formation expanded by 10.4% in Q2 and 14.6% in the year ago quarter. Government final consumption expenditure in Q2 reflected the slowing of revenue spending during the period, and contracted by 4.4%, while it had grown 8.9% in the year-ago quarter.
“While a normalising base expectedly flattened the year-on-year GDP growth in Q2FY23 relative to the previous quarter, growth relative to the pre-Covid period improved appreciably, which we believe is a better gauge of the underlying growth momentum in this period,” Nayar added.
Though improving bank credit, higher capacity utilisation and the perceived benefits from global supply chain diversification are seen to support domestic demand in the short term, the dip in external demand and high interest rates are seen to pull down the economy.
A positive feature is that inflation has moderated and may ease further in the short term. Global crude prices have averaged $91.5/bbl in August-October 2022, down from the June peak of $116.8/bbl.
The RBI had estimated GDP growth rates of 6.3% in Q2, 4.6% in Q3 and Q4 each, with 7% growth in FY23. The IMF and the OECD’s latest projections for India’s FY23 growth are slightly lower at 6.8% and 6.6% respectively.