Q1FY23 GDP at 13.5% falls short of street estimates

1 Sept 2022 , 09:33 AM

For the fiscal year FY22, India had reported real GDP growth of 8.7%. This was lower than the advance estimates by 20 bps but that is understandable considering that global markets have been in a constant state of flux. However, the estimates for GDP growth for FY23 have been maintained by the RBI at 7.2%. The real GDP growth for FY23 assumes significance for 2 reasons. Firstly, it will be the first year without the base effect advantage. Secondly, it would bring with it the added advantage of falling inflation, driven by RBI hawkishness.

On 31st August, the Ministry of Statistics and Program Implementation (MOSPI) announced the first quarter GDP growth. At 13.5%, the real GDP growth surely looks impressive. However, this is sharply lower than the estimates. RBI had pegged Q1FY23 GDP growth at 16.2% while the street consensus had pegged the Q1FY23 real GDP growth at closer to 15.5%. Real GDP growth at 13.5% Q1FY23 surely disappointed the markets. 

Data Source: MOSPI

A quick look at the trendline of the above chart is sufficient to indicate that the turnaround in GDP growth from the COVID lows has been sustained. What is remarkable is that the 13.5% real GDP growth in Q1FY23 has come on a robust base of 20.1% in Q1FY22. There is one more positive feature here. The real GDP is net of inflation. Once the RBI hawkishness results in more tangible reduction in consumer inflation, there would be an automatic upgrade of the real GDP performance. Of course, there is the risk that too much hawkishness may result in a slowdown in growth, but we will ignore that for now.

How did the GDP and GVA pan out in Q1FY23?

In the last few years, the gross value added (GVA) has emerged as a more perceptive and realistic picture of macro growth. GVA is currently used in addition to GDP. What do we understand by GVA? You can interpret GVA as; GDP shorn of the impact of indirect taxes and subsidies. Let us look at GDP and GVA growth for Q1FY23 in relative terms.

Let us look at how the GVA has grown compared to the corresponding previous quarters. Q1FY23 GVA stands at Rs34.42 trillion compared to Rs30.53 trillion in Q1FY22, implying yoy real GVA growth of 12.7%. Let us also look at how the GVA has grown compared to Q1FY21. The Q1FY23 GVA stands at Rs34.42 trillion compared to Rs25.84 trillion in Q1FY21, implying real GVA growth of 33.2% over a 2-year period.

Now for real GDP growth! Q1FY23 GDP stands at Rs36.85 trillion compared to Rs32.46 trillion in Q1FY22, implying yoy real GDP growth of 13.5%. Let us also look at how the GDP has grown compared to Q1FY21. The Q1FY23 GDP stands at Rs36.85 trillion compared to Rs27.04 trillion in Q1FY21, implying real GDP growth of 36.3% over a 2-year period. In short, growth has been decisive over last year and over the COVID lows.

A quick look at the drivers of Nominal GDP for Q1FY23

Nominal GDP is the GDP before adjusting for inflation and has a special significance. Nominal GDP shows the level of economic activity and creation of jobs, in the economy. Of course, the GDP used in common parlance is always real GDP, but nominal GDP has an analytical impact. For Q1FY23, the nominal GDP was Rs64.95 trillion, which is a yoy growth of 26.7%. On a pre-COVID 2-year basis, nominal GDP grew 67.7%. Here are the key drivers.

a)      Let us first look at private final consumption. It has risen from Rs28.47 trillion in Q1FY22 to Rs39.71 trillion in Q1FY23. That is positive growth of +39.5% yoy. Private consumption has bounced and its share in GDP is correspondingly up by 560 basis points.

b)      Government consumption expenditure has moved from Rs6.61 trillion in Q1FY22 to Rs7.32 trillion in Q1FY23. That is positive growth of +10.7%. Government initiated spending has seen growth, but its share in GDP has fallen yoy  by 160 bps.

c)      Gross Fixed Capital Formation has moved from Rs14.44 trillion in Q1FY22 to Rs18.97 trillion in Q1FY23. That is positive growth of +31.4%. Capital formation has not only picked up over last year but its share in GDP has also increased by 100 bps.

d)      The head of VALUABLES has moved from Rs0.32 trillion in Q1FY22 to Rs0.50 trillion in Q1FY23. That is positive growth of 56.3%. This is not great news as it shows diverting spending into idle assets like gold and jewellery; but levels are down over FY22 median.

e)      Merchandise Exports increased from Rs11.28 trillion in Q1FY22 to Rs14.63 trillion in Q1FY23. That is positive growth of +29.7% yoy. One of the key factors driving post-COVID recovery has been exports and its share in GDP is up by 50 bps yoy.

f)       Merchandise Imports has surged from Rs11.59 trillion in Q1FY22 to Rs18.07 trillion in Q1FY23. That is positive growth of +56.0%. A surge in import value of oil, coal, ores and fertilizers has resulted in the share of imports in GDP rising by 520 bps yoy.

To sum it up, there are two major news stories to absorb from the data above. Firstly, private consumption is back with a bang and that is good news. Even if volumes don’t pick up in a big way, pricing power will remain with corporates. On the downside, imports have surged sharply and that is resulting in a lot of imported inflation. That is the worry.

What were the sectoral drivers of GVA for FY22?

The GVA growth of 12.7% for Q1FY23 can be broken up into some important sectors that can give a clear direction of the winds blowing in the economy. The broad division of primary, secondary and tertiary sectors are further classified into more granular pieces.

Industry Segment	Q1FY23 GVA (INR)	Q1FY23 over Q1FY22	Q1FY23 over Q1FY21
Agriculture, Forestry	Rs4.93 trillion	4.5%	6.8%
Mining, Quarrying	Rs0.85 trillion	6.5%	25.62%
Manufacturing	Rs6.05 trillion	4.8%	56.2%
Power, Gas, Water	Rs0.89 trillion	14.7%	30.5%
Construction	Rs2.63 trillion	16.8%	100.0%
Trade, Hotels, Transport	Rs5.60 trillion	25.7%	68.8%
Financial, Realty	Rs8.80 trillion	9.2%	11.7%
Public admin, Defence	Rs4.66 trillion	26.3%	34.2%

Data Source: MOSPI

In the above case, the yoy GVA growth for Q1FY23 may be more reflective than the 2 year growth as the latter may be relatively magnified due to the extremely low COVID base. However, there are a few broad trends emerging. The contact intensive segments like trade hotels and transport have shown a sharp growth from the COVID lows and that can provide a key impetus to GDP. Construction is also robust, although manufacturing growth is low and likely to have strong externalities on overall GVA and GDP growth.

In a sense, the steady growth in GDP is commendable considering the global headwinds like central bank hawkishness, commodity inflation and the war situation in Ukraine are still rampant and continue to impact supply chains. Going ahead, falling inflation should now provide a leg up to real GDP growth.