GDP growth is encouraging, but faultline visible on the road ahead

With 7 percent GDP growth, India will be among a handful of economies growing at a strong pace. (Representative image)

The National Statistical Office (NSO) in the ministry of statistics and programme implementation in its first advanced estimate (AE) of the national income expects the Indian economy to grow at 7 percent in FY23. This is 20 basis points (bp) higher than the Reserve Bank of India’s and the International Monetary Fund’s estimate of 6.8 percent. India’s economic growth forecast by economists, investors and multilateral agencies in FY23 is in the range of 6.5-7.0 percent. The AE of FY23 is based on the economic performance in the first half (1H) and the likely trend in the second half (2H). The AE numbers of FY23 are an important input for the preparation of the FY23 Union Budget. These estimates will undergo a revision by factoring in the third quarter (3QFY23) corporate sector performance and will be released as the second advanced estimate of national income at the end-February.

Last year, the first AE pegged the GDP growth for FY22 at 9.2 percent and the second AE revised it downward to 8.9 percent. Likewise, FY21 growth was revised downward to -8.0 percent in the second AE from -7.7 percent in the first AE.

With the base effect gradually waning off, GDP growth, on a y-o-y basis, is expected to decline to 4.5 percent in 2HFY23 from 9.7 percent in the first half of FY23. Nonetheless on an annual basis, with 7 percent GDP growth, India will be among a handful of economies growing at a strong pace.

The worrying trend of the first AE is that barring government final consumption expenditure (GFCE), all the other demand components of GDP are expected to slow down significantly in the second half compared to the first half. Private final consumption expenditure (PFCE), the biggest component of demand (FY23: 57.2 percent) is expected to contract by 0.2 percent y-o-y in the second half of FY23 after rising  17.2 percent y-o-y in the first half). The gross fixed capital formation (GFCF) is expected to decline to 8.4 percent y-oy in the second half of FY23 compared to the growth of 15 percent in the first half.

Losing Pace

Despite the global headwinds, the moderation in real growth of exports of goods and services was, surprisingly, marginal. It is expected to decline to 11.9 percent y-o-y in the second half after rising 13 percent in the first half. On the other hand, imports of goods and services are expected to fall sharply in the second half of FY23 to 12.2 percent y-o-y against a real growth of 30.9 percent in the first half. Only GFCE growth is expected to accelerate to 7.2 percent y-o-y in 2HFY23 from a contraction of 1.3 percent in the first half indicating the usual backloading of current expenditure by the government.

The likely stark difference between the first and second half PFCE growth numbers of FY23 suggests that consumption demand has yet not become broad-based and sustainable. While car sales numbers suggest a strong demand revival, FMCG sales point towards weak demand. This is indicative of the nature of the evolving consumption demand in the post-pandemic period which is highly skewed in favour of goods and services consumed largely by the households falling in the upper-income bracket.

Gross value addition (GVA) is expected to grow at 4.7 percent y-o-y in the second half, much lower than the 9 percent rise in the first half. Interestingly, GDP growth in the second half will be about 20bp lower than the GVA growth in the first half of FY23 due to a substantial fall in net product taxes. The growth in net product taxes is expected to reduce to 3.2 percent y-o-y in the second half from 19.5 percent in the first half. This could be due to – (a) lower nominal GDP and in turn tax revenue growth and (b) significant growth in subsidies (the bill for major subsidies such as food, fertilisers and petroleum is expected to increase 19.1 percent y-o-y in the second half of FY23 from 9.9 percent y-o-y in the first half).

Barring mining and quarrying and manufacturing, the GVA growth of all other sectors is expected to be lower in the second half compared to the first half of FY23. Lower nominal GDP growth (a combination of a decline in real growth and inflation) will also mean lower wages and EBITDA growth and will have implications for both investment and consumption growth in the second half of FY23. However, a sharp increase in GFCE growth, and a simultaneous drop in GVA growth of public administration, defence and other services in the second half compared to 1HFY23 though appears perplexing. Hopefully, with the availability of more data, it would get corrected when the second AE of national income will be released by the end of February 2023.

Boost Capex

GFCF growth has remained strong, driven by the government’s focus on infrastructure development. The fixed investment rate is likely to touch a four-year high in FY23, but will still be 27bp lower than FY19 and 662bp lower than the peak of 35.8 percent attained in FY08. But for sustainable growth and recovery of the Indian economy, a revival of the private corporate sector capex is a must. Unfortunately, private corporate investment, with the exception of a few sectors, is not going beyond the maintenance capex because consumption demand is still not broad-based and the economy has yet not gathered its own momentum. Therefore, till the corporate sector greenfield capex revives, government capex must continue to provide the necessary support to the ongoing recovery.

Overall, the growth momentum witnessed in FY23, despite global headwinds, is good news and shows the resilience of the Indian economy. However, the road ahead is not going to be easy so long as private final consumption expenditure does not recover fully and becomes broad-based. The household sector, which accounts for 44-45 percent of the GVA, saw its nominal wage growth decline to 5.7 percent during FY17-FY21 from 8.2 percent during FY12-FY16. In fact, the real wage growth became nearly flat or even turned negative in some months of FY23 due to high inflation. Since much of the growth in consumption demand is driven by the wage growth of the household sector, a recovery in their wage growth is imperative for a sustainable economic recovery.

Yet, the first advanced estimate of FY23 GDP will cheer the government since the nominal GDP and in turn tax revenues are going to be much higher than budgeted and would provide adequate fiscal headroom to achieve the fiscal deficit target.

Sunil Kumar Sinha is Principal Economist and Paras Jasrai is Analyst at India Ratings and Research. Views are personal and do not represent the stand of this publication.