GDP data points towards weak growth patches ahead

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Q2 Gross Value Added (GVA) growth slowed expectedly to 5.6 percent, led by sharp contraction in the manufacturing sector, even as continued strength in services sector acted as a growth buffer. However, the GDP growth grew a tad better than our expectations at 6.3 percent, largely reflecting higher net taxes adjusted for subsidies. The nominal GDP at 16.2 percent implied the deflator grew at ~9.9 percent in Q2.

On the production side, growth disappointed in manufacturing, partly owing to margin compression, both sequentially and on a YoY basis amid higher input costs even as the top line continued to grow at a healthy pace. Construction rose 6.6 percent, while electricity demand remained resilient. Services (at 9.3 percent growth) continued to enjoy the impact of normalisation, especially in contact intensive services. Financial, real estate sector moderated sequentially as well, possibly led more by real estate amid higher input cost and higher cost of capital. Public admin, defence, others, etc. have also slowed, partly reflecting slower public sector revenue expenditure. Agriculture grew healthy at 4.6 percent, while private GVA growth slowed to 5.6 percent.

Slowing Private And Government Consumption

The Q2 GDP through the expenditure lens has private consumption once again as the leader, albeit at a slower pace of 9.7 percent YoY. This was largely expected, as the positive base effects of the previous quarter wear off. Urban and rural consumption indicators have also shown some divergence, with urban consumption doing better than rural. Government consumption declined by over 4 percent YoY, which implies that the government’s revenue expenditure slowed with the focus on capital spending. The gross fixed capital formation (GFCF) grew at just over 10 percent, with the Centre again leading in the public sector, while state capex continued to be sluggish.

In terms of the external sector, the drag from net imports continued, with imports outpacing exports due to the sustained rise in global commodity prices as well as robust domestic demand. This was expected, as the merchandise trade deficit had increased to $80.2 billion in Q2FY23 from $68.2 billion in Q1FY23, and $44.8 billion in Q2FY22.

Growth Pressures Likely To Worsen Ahead

Back home, incoming data even though slowing, remains better than emerging market peers. Improving contact-intensive services amidst stable urban consumption demand, could continue at a slower pace for some more time. However, our channel checks depict mixed demand trends during the recent festive season.

The formal sector employment growth seems to be slowing, indicated by sequential fall in EPFO new payrolls, and the Naukri Job index. Additionally, subdued real rural wage growth may further impact rural consumption. Capex indicators are healthy with further improving capacity utilisation, and signs of new investment gradually coming in with capital goods production registering an uptick.

Yet, the momentum of the recovery is still below full strength, warranting policy support, and push of government capex. The global price disruptions reflect a confluence of a China-induced slowdown, and demand curbing global policy actions. These pose downside risks to domestic economic activity. This, in conjunction with higher global uncertainty, tightening global financial conditions, lower corporate profitability, and tighter policy reaction function of the RBI, will further curb domestic demand. We retain our GDP growth forecast of 7 percent for FY23, while acknowledging the rising downside risks to the forecast.

Madhavi Arora is the Lead Economist at Emkay Global Financial Services. Views are personal, and do not represent the stand of this publication.