Is the external sector boost to GDP sustainable?

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India’s growth surprise in the last quarter of FY23 was caused in part by net exports. Although services may continue to do well, goods exports may lag as the global economy slows.

India’s economic rebound in the January-March quarter received a leg-up from its improving net exports but global headwinds could make this engine of growth sputter going forward, according to economists.

“The better-than-expected GDP print for 4Q FY23 is helped by healthier capital formation and more importantly, net exports which appears to be not-a-drag on growth, as usually seen in the cost, given India is a net importer,” Madhavi Arora, Lead Economist, Emkay Global Financial Services, said.

India's gross domestic product (GDP) growth rate rose for the first time in three quarters to 6.1 percent in January-March, significantly higher than expectations of 5.1 percent.

Asia’s third-largest economy continued to be the fastest-growing major economy with 7.2 percent growth in the last financial year.

In the January-March quarter, weak external demand and the fall in commodity prices pushed down import and export values, leading to a significant improvement in net exports, which added 1.4 percentage points to headline growth, according to Rahul Bajoria, head of EM Asia (ex-China) Economics Research at Barclays.

This was a change from the negative contributions by net exports in the previous three quarters.

Going ahead, slower global demand is likely to continue to affect India’s manufacturing and export growth, he added.

India, which runs a perennial trade deficit, has seen its trade deficit narrowing due to a rise in services exports.

The trade deficit narrowed in April to a 21-month low as softening domestic demand and easing commodity prices led to a lower import bill. The combined merchandise and services deficit fell to $1.38 billion compared to $8.37 billion in the same period last year and $6.04 billion in March. Services exports rose for the second month.

India’s seasonally adjusted GDP growth jumped from 1.1 percent on-quarter to around 1.7 percent quarter-on-quarter (QoQ) in January-March amid a rebound in growth in government spending and exports, Capital Economics said.

Looking ahead, growth will slow down over the coming few quarters as fiscal policy turns slightly less supportive and the external backdrop is weak, it added.