Q2 GDP Growth: A sequential recovery, but headwinds ahead: HDFC Bank

1 Dec 2022 , 04:54 PM

To recall, the first quarter numbers had been bumped up as the low base from the pandemic years had continued to distort the y-o-y figures. From the supply side, GVA (Gross Value Added) growth stood at 5.6% y-o-y (lower than HDFC Bank’s expectations) widening its gap with GDP growth (70bps) in the second quarter (possibly due to higher tax collections, GDP = GVA + Net Taxes).
 
On a sequential basis (q-o-q), growth was in the green in the second quarter — a signal that the economy continued to recover despite global headwinds. GDP growth rose by 3.6% q-o-q in Q2 compared to a contraction of 9.6% in Q1. Secondly, all sectors moved above pre-pandemic output levels. To recall, services like trade, hotels, transport and communications hadn’t yet surpassed pre-COVID levels in the last quarter.

Agriculture sector recorded growth of 4.6% y-o-y despite the impact of uneven monsoons on kharif production. But the bigger contributor to growth was the services segment that recorded the highest sequential growth in the last three quarters (rose by 8.7% q-o-q in Q2) — clearly reflecting the impact of the re-opening effect.

The biggest contributors to GDP growth in Q2 were investment and private consumption and the component “discrepancies”. The latter is usually a residual showing the difference between the production and expenditure approach to calculating GDP (For details on this see RBI’s paper, “Statistical Discrepancies in GDP Data: Evidence from India”, 2018). Bottomline is that a high discrepancy value does increase the likelihood of revision in the Q2 (overall and internals) numbers in the subsequent releases. Net exports and government consumption expenditure were key drags in the quarter.

Economists at HDFC Bank are holding on to their FY23 annual GDP forecast of 6.8% and expect growth in Q3 and Q4 to be between 4-4.5%. For FY24, they expect GDP growth of 6.3%, with downside risks to their forecasts. There are risks stemming from the slowdown in global growth and impact of inflation and tighter financial conditions on the consumption recovery. On the policy front, this GDP print does not change HDFC Bank’s view on RBI’s rate action in December. Inflation remains above the RBI’s upper tolerance band and warrants a further increase in rates. Economists at HDFC Bank continue to expect a 35bps rate hike in the next policy and then a 25bps in the February policy, which would take the policy rate to 6.5% by fiscal year end.