The 3QFY23 GDP growth of 4.4 percent indicates that the growth of the Indian economy is slowing down. This was on expected lines. The Reserve Bank of India (RBI) in its February 2023 monetary policy review had projected the 3QFY23 GDP growth marginally lower at 4.3 percent. Since the National Statistical Office (NSO) is still keeping the overall GDP growth of FY23 at 7.0 percent, the GDP growth for the ongoing quarter (4QFY23) works out to be 5.1 percent. Achieving this prima facie looks to be difficult due to the adverse impact of unusual temperatures and elevated levels of inflation. The cumulative impact of the aforesaid factors would be felt on consumption demand and thereby on economic growth.
Unusual Temperatures Becoming ‘Usual’
The advent of climate change is gradually becoming the usual scenario in the Indian context. Last year, India’s wheat output suffered due to heatwaves in March-May 2022, setting off a surge in the inflation of wheat and related products. The average maximum temperature during March and April 2022 was the highest and third highest, respectively, in 122 years (1901-2022). As a result, wheat production at 106.8 million tonnes (MT) was 4 percent lower than the FY22 second advanced estimate of 111.3 MT. This yield loss due to persistent heat waves during flowering and grain-filling stages is called ‘terminal heat stress’. The resulting lower procurement of wheat by the Union government pushed the wheat and related products (at the retail level) to double-digits from July 2022 onwards.
It seems it would be a repeat of that this year as well. February 2023 was already the hottest since 1877. The Indian Meteorological Department (IMD) has also recently warned of a plausible scenario of severe heatwaves during March-May 2023. This could have a bearing on the wheat output in 2023, which we expect to be falling to 107.7 MT as against the FY23 second advanced estimate of 112.2 MT. Also, the early hot summer could disrupt the supply of vegetables. Therefore, the agricultural output which has been projected to grow at 4.3 percent YoY in 4QFY23 by the NSO looks optimistic. These developments could keep inflation at elevated levels, which is a risk to the consumption demand.
Uneven Rise In Demand
In an inflationary episode driven by the rising prices of food and beverages, which is currently playing out, the poorer households have been hit harder than higher-income households. This happens because the consumption basket of poorer households is skewed in favour of food and beverage items. An empirical analysis by India Ratings and Research suggests that the effective inflation experienced by the bottom half of households during April-December 2022 has been roughly 40bp higher than the headline retail inflation of 6.8 percent. This means a higher erosion of the purchasing power of households belonging to the bottom half of the population than what is suggested by the headline retail inflation.
Moreover, the current consumption demand is not broad-based but skewed towards goods and services consumed largely by households falling in the upper-income bracket. Thus, sustaining the recovery of consumption demand has become a challenge. The goods and services of mass consumption have yet not shown a sustained pick-up. To some extent readings of the Index of Industrial Production reflect how the recovery in consumer durables and non-durables has panned out so far in FY23 - consumer durables grew 3.4 percent YoY during the first nine months of FY23 while non-durables contracted 1.2 percent.
The combined effect of the above two factors was reflected in the private final consumption expenditure (PFCE), the biggest component of GDP which grew a paltry 2.1 percent YoY in 3QFY23, an eight-quarter low. In this context, a sustained uptick in inflation driven by food and beverages due to the impact of the early summer on agricultural output would prove to be a hurdle in the recovery of rural demand. This could act as an impediment to the recovery of consumption demand becoming broad-based.
Against this backdrop, the GDP growth as pegged by the NSO at 5.1 percent during 4QFY23 looks unlikely. The aforementioned risks, in our view, could result in the GDP growth coming in at around 4 percent in the last quarter of this fiscal.
Paras Jasrai is Analyst and Sunil Kumar Sinha is Principal Economist at India Ratings and Research. Views are personal, and do not represent the stand of this publication.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
