GDP | Q2 growth print masks underlying impulses in economic activity

Due to the decreased WPI inflation, GDP growth slowed from 27% in Q1 to 16% in Q2. This is anticipated to slow down even more in the upcoming quarters, allowing for a break from the front-loaded tightening of monetary policy.

Just slightly higher than analysts' median estimate, GDP growth for Q2 FY23 was reported at 6.3 percent yoy (after 13.5 percent in Q1). But the Gross Value Added (GVA) measure of growth turned out to be much lower, at 5.6 percent. GDP is calculated by adding GVA to indirect taxes and subtracting subsidies. As a result, the GVA is a more accurate indicator of overall economic activity and aggregate demand.

In terms of economic activity by sectors, other than agriculture, the growth rates were lower than expected for almost all other segments. Agriculture growth continued at a higher-than-trend level at 4.6 percent. This is likely due to high output in animal husbandry, dairy, forestry, fisheries, etc. since growth in cereals, oilseeds, and pulses other staples had been negative or flat, due to the uneven rains.

Growth in the services sectors were mostly on expected lines, although slightly lower than our estimates. The outperformer was the ‘Trade, Hotels, Transport and Communications' segment, which grew 14.7 percent yoy. Anecdotal signals suggested that travel in particular had resumed, particularly just prior to the festive season months. However, construction activity still remained muted, in part due to the rains and slower spending by state governments on capex as well as, reportedly, delayed payments.

Activity in "Public Administration, Defense, and Other Services" was also moderately low (6.5 percent). It is assumed that growth in the "Other Services" component, which made up 56 percent of this larger segment in FY18, grew less slowly than growth in public administration. This component includes all services offered by (generally smaller) businesses in the range of professional and repair services used by households and micro and small businesses. We believe that in order to measure activity in these segments, the National Statistical Office (NSO) now uses data derived from GST payments, with the assumption being that smaller businesses are still constrained.

However, the real weakness was in the manufacturing sector, with a sharp 4.3 percent contraction (after a 4.8 percent growth in Q1); this contraction was despite a very favourable base effect in Q2 of FY22. This is borne out by growth in the Index of Industrial Production (IIP) as well, which grew an average tepid 1.5 percent in Q2 FY23, post a 13 percent yoy growth in Q1. This needs to be understood in some more detail. Some part might be due to a constrained supply of ores and minerals (especially coal) since the mining sector also contracted by 2.8 percent. But the deeper story might be of a moderation in consumption and demand, given that September would probably have seen a build up of inventories prior to the festival season in October. We have heard of weak rural demand as well as lower income urban households, despite more premium consumer durables and FMCG sales doing well.

Exports of goods are likely to have been the other problem. From a yoy average of 25% in Q1, total export growth in US dollars has slowed to an average of 3% in Q2. The slowdown in core exports was even more pronounced when petroleum products were excluded; it was -1.5 percent as opposed to +14 percent in Q1. The selective export controls, export duties on steel and other commodities, windfall taxes, and other factors undoubtedly contributed to some of this, but the larger story is the gradual slowdown in the economies of developed markets, some of which are important export destinations.

In the GDP report, exports increased by 11.5% in Q2, while imports increased by 25%. (these comprise both merchandise and services trade, the latter has held up quite well) The sharp 17 percent contraction in October's merchandise exports, despite the fact that the duties and controls have now largely been lifted, suggests that worse times are still to come.

From the output side, that was. When examining the demand-side growth profile for Q2, private consumption appears to have maintained steady at 9.7 percent yoy, but government spending decreased by 4.4 percent, causing a slowdown in overall consumption expenditure to 7.7 percent yoy (vs 21.3 percent in Q1). However, fixed investment (both private and public), which is significant for the medium term as well as for FY23 and FY24, is still relatively high (10 percent, despite declining from 20% in Q1).

Additionally, inventories kept getting depleted, likely clearing factory and dealer stocks, which is excellent for production prospects in the near future because these inventories would need to be refilled.

Finally, nominal GDP growth slowed from 27% in Q1 to 16% in Q2, reflecting lower WPI inflation, which is predicted to continue to fall in the quarters ahead and provide a break from the front-loaded tightening of monetary policy. Overall, we anticipate FY23 GDP growth to be close to 7%, with a small amount of room for upside. This is very positive in an increasingly slowing global economy.