Disappointing numbers | The Financial Express

Disappointing numbers

It would be interesting to see whether the Q1 GDP growth figures will alter RBI’s rate hike path

Disappointing numbers
The pent-up demand appears to have been over-estimated, though it is possible the opening up of contact-intensive sectors will boost spending in the months ahead.

At 13.5% year-on-year (y-o-y), the GDP growth for Q1FY23 has been disappointing despite a favourable base. Indeed, the output of Rs 36.85 trillion has got a boost from the 4.5% y-o-y growth in agriculture, suggesting the economy might take a little longer to pick up pace than anticipated. Nowhere is the muted momentum as clearly reflected as in the private final consumption expenditure (PFCE), the biggest piece of the economy. The actual spend, at Rs 22 trillion, is only about 10% bigger than the spend in Q1FY20, which in itself was a poor quarter. The pent-up demand appears to have been over-estimated, though it is possible the opening up of contact-intensive sectors will boost spending in the months ahead. However, sectors such as manufacturing need to up their contribution, especially to the job market, to boost consumption. Indeed, manufacturing grew at just 4.8% in the June quarter, with the absolute value falling sequentially to Rs 6 trillion.

That is a worrying trend even if one takes into account seasonal effects. While the gross fixed capital formation (GFCF) during Q1FY23 came in at a satisfactory Rs 12.7 trillion, the highest in a few quarters, much more investment would be needed to drive growth. However, the progress on the ground isn’t encouraging. An analysis by Nomura reveals that central government capex has moderated in the current fiscal so far, rising just 5% y-o-y (ex-roads), while the trend in the states has been equally disappointing. For 11 key states, which account for 65% of the aggregate capex, Q1FY23 saw a fall of 3.2% y-o-y.

Also Read: Centre reports fiscal surplus in July, first in over two years 

Indeed, with the base effect starting to fade and the many headwinds on the horizon—rising interest rates, tighter liquidity, elevated inflation, slower global growth and trade—it would be difficult for the economy to clock a growth of 7%-plus without substantial investment. Data from the banking sector shows that aggregate project approvals in FY22 jumped 90% versus a dull FY21, but remained below trends. However, there are signs of a pick-up in the number of projects compared with the numbers three years back, and given that corporate balance sheets are in good shape and the government is rolling out several schemes to boost manufacturing, it is possible that the capex cycle could take a big upturn. The biggest positive both for companies and consumers has been the softening in the prices of commodities although crude oil prices continue to rule above $100 per barrel.

There is, however, one very big concern in the exports sector. As Pranjul Bhandari, chief economist, HSBC India has observed, the growth in real exports is slowing. After rising by an average 8.7% y-o-y in April-July, 2019-2021, it has fallen to 4.9% in the April-July period of 2022. She believes if this softening continues in the rest of the year the contribution of the exports sector to GDP growth will be only a quarter of what it was last year. In the June quarter, exports accounted for 23% of GDP. With growth not gaining the required pace, the Reserve Bank of India (RBI) may need to slow the pace of rate hikes though the central bank has said it is now focused on tackling inflation. As the worst of inflation appears to be behind us, it would be interesting to see whether the GDP outcome will alter RBI’s rate hike path. Also, some depreciation of the rupee would certainly help make exports more competitive.

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