As expected, India’s GDP growth soared to double-digits in year-on-year (YoY) terms in Q1 FY2023, led by the low base of the excruciating second wave of COVID-19 in India in Q1 FY2022, and the robust, albeit incomplete, revival in contact-intensive services.
The initial YoY growth estimates released by the National Statistical Office (NSO) for GDP and the gross value added (GVA) for Q1 FY2023, of 13.5 percent and 12.7 percent, respectively, are rather similar to our own forecasts of 13 percent and 12.6 percent, respectively. The upside in the GVA growth relative to our estimate is driven by agriculture, forestry, and fishing, which the NSO has assessed at 4.5 percent. This figure appears exceedingly optimistic in light of the adverse impact of the heatwave on the rabi output of wheat.
Within industry, the YoY growth of mining, manufacturing, and electricity (6.5 percent, 4.8 percent, and 14.7 percent respectively) fell short of our projections, belabouring the adverse impact of commodity prices on producers’ margins.
The double-digit rise in the GVA in Q1 FY2023 was led by a rebound in services activity on a low base, with two of the three sub-sectors, namely public administration, defence, and other services, and trade, hotel, transport, communication, etc. displaying a resounding YoY expansion in excess of 25 percent.
Relative to the pre-COVID-19 level, the GVA reported a modest 4.7 percent rise in Q1 FY2023. The fastest growing sub-sectors were public administration, defence and other services, electricity and other utilities, financial, real estate and professional services, and agriculture, forestry, and fishing. However, trade, hotels, transport, etc. stood out as the only sub-sector reporting a contraction in Q1 FY2023 relative to the pre-COVID-19 level, in line with the incomplete recovery in contact-intensive sectors.
The YoY GDP growth of 13.5 percent in Q1 FY2023 was boosted by private final consumption expenditure and gross fixed capital formation (GFCF), whereas government final consumption expenditure (GFCE) displayed an anaemic YoY growth of 1.3 percent. The latter is surprisingly at odds with the sharp 26.3 percent expansion in public administration, and defence and other services in the same quarter. Further, net imports exerted a considerable drag on growth, portending a nail-biting current account deficit (CAD) for Q1 FY2023.
Looking ahead, the core sector data gave us a glimpse of volume trends in July. After two months of optically high double-digit growth on the low base of the second wave of COVID-19, core sector growth slid to 4.5 percent in July. The steel sector was the only outlier, with a sequential pickup in growth in July.
We estimate that GDP growth will moderate to mid-single digits in Q2 FY2023, as the base effect normalises. Moreover, an uneven monsoon is likely to pare agricultural GVA growth, and constrain rural demand. Signs of weakening of external demand have emerged since late-June, with a slowdown in domestic merchandise exports, following the fears of a global recession amid monetary policy tightening, the ongoing Russia-Ukraine conflict, and fresh uncertainties around the US-China tensions.
Using a trimmed version of the Bloomberg Commodity Index, we find that commodity prices are on average ~9 percent lower in July-August 2022 vs. Q1 FY2023. While this augurs well for demand, margins, and, therefore, value added growth, the performance of Corporate India in Q2 FY2023 would continue to face constraints as supply chain issues are easing only gradually.
Nevertheless, a continued recovery in contact-intensive services, should support a YoY GDP growth of 6.5-7 percent in the ongoing quarter. At present, we maintain our estimate of real GDP growth for FY2023 at 7.2 percent, with a sustained correction in commodity prices posing an upside, and geopolitical tensions positing a downside.
What does the Q1 FY2023 GDP print augur for the monetary policy committee’s (MPC’s) next decision? GDP growth in Q1 FY2023 printed substantially lower than the MPC's projection of 16.2 percent. We also expect the CPI inflation to mildly undershoot the MPC’s forecast for the ongoing quarter. This suggests a high likelihood that the next rate hike in September would be of a smaller quantum than the 50 bps each seen in the last two policy reviews.
A hawkish US Federal Reserve appears determined to clamp down on robust US demand to align it with supply, in a bid to cool inflation, and prevent inflationary expectations from unhinging. Its next decision will be revealed shortly before the MPC’s end-September policy review. We continue to believe that domestic considerations will remain paramount for the MPC’s rate actions. Having said that, the INR may continue to face intermittent hiccups, as seen recently when it crossed 80/USD after the Jackson Hole speech.Aditi Nayar is Chief Economist, ICRA Limited. Views are personal, and do not represent the stand of this publication.