The Chimeric Bounce In GDP Has Little To Cheer About

The better-than-expected bounce in the real GDP print at 6.1% in the fourth quarter of FY23 has puzzled many. It has prompted analysts to upgrade their projections for FY24 from 6.0–6.5% to closer to 7%. But such impulsions could be hasty.

The private sector, contributing 81% of domestic spending, including household and corporate consumption, and investments have collectively enfeebled, depicting a pronounced K-shaped recovery. The remaining 19%, contributed by government consumption and investments, has been the biggest contributor to the bounce, particularly capex which contributes 7% of total spending.

To gauge the true pulse, we should have disaggregated numbers of consumption plus investments for private and public spending.

Real private final consumption expenditure grew modestly at 2.8% in Q4, slower than 4.7% three-year compound annual growth rate (FY20-23) and 0.4% quarter-on-quarter seasonally adjusted or 1.6% annualised. Nominal PFCE/GDP has declined sharply to 58.4% (-480bp QoQ), depicting that the bulk of the economy is slowing rapidly.

Government final consumption expenditure grew at a meagre 2.3% YoY in Q4 vs 1.6% 3-year CAGR (FY20-FY23). The conservative fiscal stance has meant feeble government spending support. While Q4 saw a bunch of subsidy payout, it is weighed down by the cumulative rise in the incidence of indirect taxes, as reflected in rising GST collections remains high.

The tricky bit is to ascertain the strength of private gross fixed capital formation, which forms a significant portion.

During FY19-22, real GFCF grew by a meager 2.4% (3-year CAGR) and despite the large allocations by the government on infrastructure, the public sector GFCF grew by 2.6% (3-year CAGR), lower than that of private corporations at 3.2%. The core industrial capex depicted by machinery and equipment grew by a meager 0.25%.

Due to the favorable base effect, FY22 was the best of recent years with overall GFCF rising by 14.6% (-7.3% in FY21). But the private sector capex in industrial machinery was anemic and most indicators suggest that it remained elusive even in FY23.

The capital goods index (8.2% weight in IIP) grew by a strong 9.7% in Q4. But its decomposition shows that the sub-group of quantity-related variables (49% weight) contracted by 2.8% YoY, dragged down by metal products and railway coaches. It was overweighed by the balance sub-group collated in nominal values (INR), aggregated into the IIP basis an assumed deflator, which grew by a huge 23% in imputed real terms, led by consumable wires and railway wagons. Overall, the elements showing buoyancy in the quantity sub-group are dominated by government infrastructure activities, but still trending 50% lower than pre-Covid. The nominal subgroup’s (9% YoY nominal terms) contribution in Q4 is buoyed by the lagged impact of high global commodity prices (correlation of 0.84) and the deflator for the Q4 being suppressed (-14% YoY) by the contemporaneous decline in commodity prices; thus, this sub-group is characterised largely by a technical bounce. 

While the aggregate GFCF slowed to 11.4% in FY23 (8.9% in Q4), the four-year CAGR increased to 4.6% from 2.4% during FY19-22. But it is unclear whether there is evidence of private capex revival along with the housing sector gaining momentum or if the gigantic expansion in government capex still leading. Our guesstimate of the decomposition of real GFCF growth of 8.9% in Q4 is based on proximate variables for FY23, typical seasonality and FY22 apportionment of capex across institutions.

First, CMIE data shows that during FY23 and 2HFY23, net fixed assets of all non-finance companies grew at 4.4% and 4.5% YoY respectively (2H at INR37.3 trillion from 3,121 companies). We assume a higher nominal growth of 5% in FY23 and 4% for Q4. Thus, using the GDP deflator for GFCF (3.8%), it is likely that the real growth in private GFCF may be close to zero. This is also corroborated by components of capital goods index. 

Second, considering the slowing mortgage lending growth of banks (15% YoY in Q4), and cement production (3.5% YoY in Q4, 8.6% FY23), our optimistic guess for real growth in housing sector is 10% for FY23 and -2% for Q4 FY23.

Thus, the private sector aggregate GFCF probably grew by 2-3% in nominal terms in Q4 and contracted by 1% in real terms. Hence, for 8.9% growth in GFCF in Q4, it would imply that overall public sector GFCF could be in the order of 37%!

Adding up the components of real PFCE and the estimated private GFCF, we arrive at aggregate real private demand growth of just 2.1% in Q4. Contrastingly, the overall public sector spending is estimated to have grown by 15.3%, significantly contributed by infra spending. Thus, in the overall domestic demand growth of 4.8% in Q4, private demand contributed 1.6% and the balance two-thirds at 3.2% came from the public sector.

Therefore, the surprising bounce in Q4 GDP reflects the steroidal fiscal intervention to rebalance the dominant but sagging private investment and consumption demand. But the fiscal multiplier impact has been facile. The narrowing of the external deficit to 1.6% of GDP from 4% in Q3 is due to weak private demand reducing imports, whereas exports have edged up, thanks to the services sector.

Going forward, the slowing of Indian corporates, the peak out of urban demand, and the continued unemployment and household income problems are likely to sustain slackness in private demand. The counterbalancing fiscal impetus is likely to wane as a deceleration in nominal GDP growth (10.4% YoY in Q4) will weigh on gross tax collections.  The delayed recession in the AEs has come as a boon. But a sharper global trade volume growth deceleration (1.7% 2023 vs 2.7% 2022, WTO) can make India vulnerable. India's growth elasticity to global export volume growth has risen to 1.8x during 2016-22 vs pre-GFC (2002-08) at 1.02x.

Thus, with FY23 delivering a real GDP growth of 3.3% 3-year CAGR, 4Q real GDP trending 4% lower than the pre-covid trajectory of 4.5%, and, private consumption trending 10% lower, it will be difficult for India to deliver growth higher than 5% in a realistic scenario.

Dhananjay Sinha is co-head of equities & head of research, strategy & economics, Systematix Group.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.