GDP FY23: Starting On A (Not So) High Note

The Indian economy grew at the fastest pace in four quarters on a low base. But the GDP growth numbers were below median economist estimates.

GDP growth in Q1 FY23 was at 13.5% year-on-year compared to 4.1% in the previous three months. The Reserve Bank of India had forecast it at 16.2%.

GVA grew 12.7% compared with 3.9% in Q4.

Lower-than-forecasted numbers, along with rising downside risks globally, may force a downward revision in GDP growth for the full financial year. Some economists have revised projections for the full fiscal, while others have flagged downside risks.

The RBI pegged the full-year growth at 7.2%.

Given that April-June 2022 GDP growth has disappointed significantly compared to the RBI's forecast, it will not be a surprise, if the RBI decides to slow down its pace of rate hikes to 25 basis points clips from September onwards, Kaushik Das, chief economist at Deutsche Bank, said.

Sequential Contraction 

The advancement in growth was driven primarily by a delta wave-induced low base, even as a sequential recovery continued to gain momentum across sectors, Rahul Bajoria, chief economist at Barclays, said.

Tightening domestic and global financial conditions, elevated input costs and the bleak global growth outlook remain key downside risks to India's growth trajectory in the coming quarters, he said.

“On a sequential basis, GDP contracted 3.3% quarter-on-quarter on a seasonally adjusted basis in Q1 FY23, reversing the 0.5% QoQ expansion seen in Q4 FY22.”

Bajoria, however, said a resilient growth backdrop would likely result in the RBI retaining its focus on containing inflation, “which makes its policy choices relatively clear in the short term”.

Rising Downside Risks To Growth 

In the near term, demand conditions are likely to remain steady, led by a continuing pickup in the services sector, a research note by Kotak Institutional Equities said. The onset of the festive season will also likely provide support to growth.

But downside risks are increasing from:

• Higher probabilities of a recession across major advanced economies (effects of which are likely to spill into FY24 impacting exports, manufacturing, and flows.

• Slowing global demand percolating to domestic demand, which can push out the investment cycle further.

• The lagged impact of domestic monetary policy tightening.

“Keeping in view the imminent global slowdown and factoring in the Q1 FY23 print, we revise down our FY23 and FY24 real GDP growth estimates by 50 basis points each to 6.8% and 6%, respectively, with risks skewed to the downside,” Suvodeep Rakshit, senior economist, Kotak Institutional Equities, and Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, wrote in the note.

Madhavi Arora, lead economist at Emkay Global Financial Services, said, “We retain our GDP growth forecast of 7% for FY23, although we reckon there are rising downside risks to our estimate.”

The global price disruptions reflect a confluence of the China slowdown, protracted shortage of critical inputs, the extended war in Europe and demand-curbing global policy actions. All these factors pose downside risks to domestic economic activity, Arora said.

This, in conjunction with higher global uncertainty, tightening global financial conditions, lower corporate profitability amid high input costs and tighter policy reaction function of the RBI, will further curb domestic demand.

Elevated GDP Deflator 

“We see no need in changing our FY23 and FY24 full year GDP growth estimate of 7.1% and 6.0% respectively, though we expect the RBI to revise its FY23 growth forecast of 7.2% lower in its next meeting on Sept. 30, 2022,” Deutsche Bank's Das said.

First Estimates Underreported

First estimates of GDP are likely underreported by 50-60 basis points, according to Neelkanth Mishra, co-head of Asia Pacific Strategy and India strategist for Credit Suisse. Quarterly GDP estimates are IIP-dependent, and of the five updates to a year's GDP growth, the first two estimates rely heavily on IIP for GDP estimation, whereas the final revision relies on the more comprehensive Annual Survey of Industries, Mishra said.

Over the past decade, growth in India's IIP has averaged just at 3.1%, Mishra said. But industry GVA growth-ex-construction, which IIP does not capture, has grown at 6% CAGR over the same period.

Given that industry, ex-construction, accounts for 22-24% of India's GVA, the persistent 1-2 percentage point understatement seen in IIP suggests that the first prints of GDP may be underreporting growth by 50-60 basis points, he said. “We continue to expect stronger-than-consensus growth in the economy, and quarterly updates may be understating them.”