THE Q3 TUMBLE
That India’s GDP grew just 4.4 per cent in the third quarter (Q3) of 2022-23 compared to 5.2 per cent in the same quarter of the previous fiscal caught many by surprise. For an economy widely touted to show a yearly GDP growth of 7 per cent for the fiscal year, the Q3 numbers seem disappointing. To target 7 per cent, the economy will have to grow at over 5 per cent in Q4. How feasible is that, given the challenges all around?
The biggest disappointment came from manufacturing, which, despite a focus on making in India and production-linked schemes, still showed de-growth. Growth in the sector was -1.1 per cent in Q3FY23, compared to a growth of 1.3 per cent in the year-ago quarter. Moreover, from a growth of 6.4 per cent in Q1FY23, manufacturing had slipped to -3.6 per cent in the second, only to recover a bit in the third. Some experts attribute the slowing growth in manufacturing to the weak profit and loss accounts of companies in the sector, where their Q2 financial results record a fall in profits due to high input costs.
High inflation has not only stoked the prices of key inputs but also dampened consumption. When demand is weak, manufacturers cut down production. High input costs and sagging demand mean that profits take a hit, as reflected in the manufacturing numbers for the quarter, says Madan Sabnavis, chief economist with Bank of Baroda.
Commentators allude to India as a bright spot in the gloom that pervades the world economy. It’s been over a year since Russia’s invasion of Ukraine and the conflict, which shows no sign of ceasing, continues to add to global inflation. The only factor helping stabilise crude oil prices is, quite ironically, the threat of a recession, which can jeopardise the little post-Covid revival countries have seen.
Exports have been an obvious casualty of this—they dropped 12 per cent year on year in December to $34.5 billion (Rs 2.8 lakh crore). “The worry is that export demand may slow down in the coming quarters even as advanced countries witness a downturn,” says D.K. Joshi, chief economist with Crisil. This can further harm manufacturing.
Construction seems the only exception to the declining trend, growing 8.4 per cent in Q3FY23 compared to just 0.2 per cent in the year-ago period. The government’s thrust on infrastructure and big capital expenditure plans will continue to drive construction. Investment has been robust in infrastructure sectors such as steel and cement, says Sabnavis. Relief also came in from agriculture, which grew 3.7 per cent in Q3 compared to 2.3 per cent a year ago. The rebound in retail post the pandemic was evident in the 9.7 per cent growth in the services sector. Some economists attribute the lower-than-expected growth in Q3 to the upward adjustment in the base year GDP. The growth for FY22 was revised to 9.1 per cent from 8.7 per cent earlier. The contraction in GDP in FY21 was revised to 5.7 per cent from 6.6 per cent earlier. Pranjul Bhandari, chief India economist at HSBC, says the level of output in Q3 compared to pre-pandemic quarters continued to improve.
Most economists, including Joshi and Sabnavis, feel the overall 7 per cent growth for the year is achievable. “The upper revision (of the GDP numbers) shows the economy was more resilient to the pandemic,” says Joshi. “India should be able to clock 5 per cent growth in the last quarter, so the overall growth for the whole year would be 7 per cent.” Sabnavis pegs full fiscal growth at 6.8 per cent. But weak global growth, uncertainty in crude prices, high inflation and high interest rates can spoil the party, they say. Climate change can play havoc with agriculture, and further threaten growth. ■