Has India's GDP taken a turn for the better or worse? Depends on how you look at it

GDP

India’s economic growth is slowing. The question is how badly. The October-December Gross Domestic Product (GDP) growth of 4.4 percent was the slowest in three quarters. What’s worse is this growth comes on top of a modest 5.2 percent gain in the corresponding period of FY22.

The internals of GDP growth data give more reason to worry. Manufacturing Gross Value Added (GVA) shrank 1.12 percent, the second straight quarter of contraction for the sector. One more quarter of contraction would mean India has a manufacturing recession underway. Analysts believe the odds of this happening are high.

Services growth, too, has slowed; the GVA growth for the third quarter, at 6.19 percent, was again the slowest in three quarters.

Nomura warns that growth has peaked and that coming quarters would steadily moderate. “We believe India’s growth cycle has peaked, and a combination of weaker global growth and tight domestic and global financial conditions could further impair the growth drivers viz. exports, investment and discretionary consumption,” analysts at the brokerage wrote in a note.

More bad news is in the offing as growth in private consumption, the bedrock of India’s economic growth, dropped sharply to a mere 2.1 percent for the quarter.

Consumer sentiment indices may show that Indians are optimistic but they are clearly not putting their wallet where their mouth is. Fast-moving consumer goods (FMCG) firms are already crying hoarse about slowing consumption in rural centres.

Fireflies of hope

Not all analysts are worried about the slowdown. One, the deceleration is in line with the expectations of policymakers. The Reserve Bank of India had projected a slowing growth in the third and fourth quarters of FY23 in its policy statement.

Second, the good old base effect is in the works. The FY22 GDP growth was revised upwards by the Central Statistical Organisation (CSO) to 9.1 percent from 8.7 percent. That means the base is higher than originally anticipated, which pulls down the growth rate for the current year.

Even so, the CSO has retained the current year growth projection at 7 percent. A DSP Mutual Fund quick note points out that much of the slowdown is owing to revisions of the previous year's data. Further, on a sequential basis, growth has picked up in the third quarter.

Percentages may seem sobering but absolute figures show the economy may be doing better. In absolute terms, the CSO had estimated GDP for FY23 to be Rs 157.60 lakh crore in its first advance estimates released in February. Now, the CSO sees GDP for the year to be Rs 159.71 lakh crore, which is higher.

This indicates the incremental data collected by the CSO has been better than before. The economic research wing of the State Bank of India (SBI) pointed out that all sectors have crossed the pre-pandemic level, which should be encouraging.

SBI economists also draw attention to the revised FY22 metrics that show Gross Capital Formation (GCF) was not as badly hit post the pandemic as earlier anticipated.

“The trends in GCF to gross output ratio or the plough back of funds for the creation of fresh capacity shows no specific trend, except for public administration where the ratio attained a fresh peak in FY22 owing to an emphasis on capital expenditure in recent budgets,” SBI wrote in a note.

How should the markets read the GDP data then? Both the stock and the bond market seem to have largely ignored it. Indices have gained marginally, while the 10-year bond yield was unchanged on March 1.

“Growth number is broadly in line with RBI’s own projections and is unlikely to shift RBI’s projections materially,” point out analysts at Barclays.

With the GDP data not expected to alter the course of policy materially, markets continue to keep their telescopic eye on global developments.