GDP | Q2 growth print masks underlying impulses in economic activity

Representative image.
(Image: AP/File)

Representative image. (Image: AP/File)

GDP growth for Q2 FY23 printed at 6.3 percent yoy (after 13.5 percent in Q1), just slight above analysts’ median estimate. However, growth by the Gross Value Added (GVA) measure tuned out to be substantially lower at 5.6 percent (vs 12.7 percent in Q1). Formally, GDP is equal to GVA plus indirect taxes minus subsidies. Hence, the GVA is a better measure of underlying 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.

Also on the lower side, activity in the ‘Public Administration, Defence and Other Services’ was also moderate (6.5 percent). Growth in the ‘Other Services’ component (which was 56 percent of this larger segment in FY18) is presumed to have been weaker than in public administration; this comprises all services provided by (largely smaller) enterprises in the multiple repair and professional services used by households and micro and small enterprises. We believe that the National Statistical Office (NSO) now uses data generated from GST payments to measure activity in these segments, and the presumption is that smaller enterprises 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.

The other source of weakness is likely to have been merchandise exports. Total export growth in US Dollar terms had slowed to an average 3 percent in Q2, down from 25 percent yoy in Q1. Excluding the exports of petroleum products, the slowdown in core exports was even more stark; -1.5 percent vs +14 percent in Q1. Of course, some part of this is due to the selective export controls, export duties on steel and other commodities, windfall taxes and so on; but the larger story is the gradual slowdown in the economies of the developed markets, some of which are large export destinations.

In the GDP release, exports were up 11.5 percent in Q2, while imports were up 25 percent (these comprise both merchandise and services trade, the latter has held up quite well) While the duties and controls have now largely been withdrawn, the sharp 17 percent contraction on October merchandise exports points to deeper pain ahead.

That was from the output side. Looking at the Q2 growth profile from the demand side, private consumption seems to have held up fairly well at 9.7 percent yoy, but government consumption contracted 4.4 percent, resulting in overall consumption expenditure slowing to 7.7 percent yoy (vs 21.3 percent in Q1). On the other hand, fixed investment (both private and government) continues to be quite strong (10 percent, although down from 20 percent in Q1), which is important not just from a FY23 and FY24 perspective, but also from the medium term.

Another point is that inventories continued to be drawn down, probably clearing factory and dealer stocks, which is good for production prospects in the near terms as these inventories will need to be replenished.

Finally, in nominal terms, GDP growth moderated from 27 percent in Q1 to 16 percent in Q2, reflecting the lower WPI inflation, which is expected to moderate further in the quarters ahead, which will allow a respite from the front loaded monetary policy tightening. Overall, we expect FY23 GDP growth to be near 7 percent, with some slight upside, which is very good in a rapidly slowing global economy.

Saugata Bhattacharya is Executive Vice President and Chief Economist, Axis Bank. Views are personal, and do not represent the stand of this publication.