Q2 GDP growth in line with RBI estimate at 6.3%
Indian economy grew at 6.3% in the quarter ending September 2022, the National Statistical Office (NSO) said in a release on November 30, putting GDP growth for the first half of the fiscal year at 9.7%. Private consumption rose 9.7% in the quarter, and investments, as reflected by gross fixed capital formation, by 10.4%, pointing to a continuing recovery in the economy, but analysts said global headwinds will temper growth over the current quarter and the next.
The latest GDP number is exactly in line with the September 2022 projection of the Monetary Policy Committee (MPC) and marginally higher than the 6.2% growth projection by economists in a Bloomberg poll. However, the larger trend in the GDP numbers is that of moderation of growth momentum which is also in keeping with the MPC’S projections of GDP growth coming down to 4.6% in both the remaining two quarters of the fiscal year. The fact that growth of eight core sector industries plummeted to 0.1% in the month of October according to data released Wednesday, supports this prognosis.
To be sure, India will continue to be the fastest growing major economy in the world in 2022-23
and 2023-24 according to most institutional and private forecasters. “In an uncertain external environment, domestic demand is expected to drive GDP growth,” Chief Economic Advsior (CEA) V Anantha Nageswaran said reacting to the GDP numbers, adding that the Indian economy is on track to achieve a 6.8-7 % GDP growth in 2022-23.
What makes the latest GDP numbers significant is that they will be the latest available input on the state of the economy for the 2023-24 Union Budget, the consultations for which have already started and which will likely be presented on February 1, 2023.
The CEA also said that he expects further easing in inflation “on the back of softening global commodity prices and expectations of a good Rabi (winter) crop” which should support corporate earnings, provided the geopolitical situation does not deteriorate drastically. Notwithstanding global headwinds, India’s growth momentum is propelled by festival sales and domestic demand that is seen in bank credit growth, auto sales data shows and other high frequency data, he added. “Stable banking sector is a major source of resilience amidst formidable global headwinds,” Nageswaran added. To be sure, he cautioned that “tightening of financial conditions” in the US and other advanced economies remains a future risk.
Growth in Gross Value Added (GVA), which measures economic activity net of taxes was 5.6%in the quarter. Nominal GDP growth in the September quarter stood at 16.2%, almost ten percentage points higher than the real growth. This is bound to have generated significant tailwinds for revenue collections, as taxes are a fraction of nominal not real incomes.
While the September quarter GDP growth number is significantly lower than the 13.5% number for the quarter ending June , this is more a reflection of petering out of favourable base effect than a radical slowdown in the level of economic activity. To be sure, the latest numbers do reflect some amount of moderation in the growth momentum and the MPC of RBI expects overall growth in 2022-23 to be 7%. The October 2022 edition of IMF’S World Economic Outlook (WEO) projects India’s GDP growth for 2022-23 and 2023-24 at 6.8% and 6.1%.
A sector-wise analysis of the GDP statistics shows that the there is a significant divergence as far as the health of various parts of the economy are concerned. For example, manufacturing saw a contraction of 4.3% in the September quarter while the trade, hotel, transport and communication sub-sector saw a growth of 14.7% on an annual basis. This suggests that normalisation of service sector activity is driving growth. The fact that index of eight core sector industries grew at just 0.1% in the month of October suggests that manufacturing will continue to weight negatively on the economy’s overall growth performance. Agriculture and allied activities had a healthy growth of 4.6% in the September quarter.
On the expenditure side, the Private Final Consumption Expenditure (PFCE) grew at 9.7% on an annual basis while Government Final Consumption Expenditure (GFCE) contracted by 4.4%, the first since June 2021. The share of Gross Fixed Capital Formation (GFCF) – it measures investment activity in the economy – in total GDP was 34.6%, similar to the 34.7% level in the June quarter. While some analysts have been talking about a revival of investment cycle in the economy, the disappointing performance in manufacturing numbers – manufacturing GVA growth in the first half of the fiscal year is just 0.1% -- raises questions on this thesis.
“After accounting for today’s data, we continue to expect fullyear real GDP growth of 7.0% for FY22-23, although risks are tilted modestly to the downside. While we see room for India to continue to outperform, India growth trajectory is pointing towards a soft landing, as the impact of slowing global activity, sticky commodity prices, and tighter domestic monetary conditions take a toll, at the margin”, Rahul Bajoria, MD & Head of EM Asia (ex-china) Economics, Barclays said in a note.