Q3FY23 GDP at 4.4% falls short of street estimates

1 Mar 2023 , 12:27 PM

However, the actual GDP growth came in at 4.4%, which is much lower than street estimates. Normally, the GVA (gross value added) is lower than the growth in GDP. However, in the third quarter ended December 2022, the GVA growth at 4.6% is 20 bps higher than the GDP growth rate at 4.4%; largely due to the higher base.

How did the GVA pan out in the third quarter of FY23?

The gross value added (GVA) has emerged as the key measure for getting a picture of macro growth. Here again, the GDP is the starting point. However, from the GDP, the impact of indirect taxes and subsidies are removed to get GVA. The table below captures the GVA trend for the first three quarters of FY23 along with the yoy growth rates.

Quarterly Estimates of GVA at Basic Prices for Q3 (October-December) 2022-23 (at 2011-12 Prices)
Industry classification	2022-23 Q1	2022-23 Q2	2022-23 Q3	2021-22 Q1	2021-22 Q2	2021-22 Q3	2022-23 Q1	2022-23 Q2	2022-23 Q3
Agriculture, Forestry	4,97,266	4,29,755	6,93,475	3.4	4.8	2.3	2.5	2.4	3.7
Mining & Quarrying	82,664	64,594	78,732	12.2	10.6	5.4	9.3	-0.4	3.7
Manufacturing	6,39,243	6,29,798	6,14,982	51.5	6.6	1.3	6.4	-3.6	-1.1
Utilities	90,134	87,449	81,537	16.3	10.8	6.0	14.9	6.0	8.2
Construction	2,77,110	2,69,647	3,04,883	77.0	10.8	0.2	16.2	5.8	8.4
Trade, Hotels, Transport	5,94,900	6,79,015	7,16,297	41.4	13.1	9.2	25.7	15.6	9.7
Financial, Real Estate	8,82,147	9,33,441	7,45,836	2.8	7.0	4.3	8.6	7.1	5.8
Administration, Defence	4,39,726	4,72,794	4,81,331	6.5	16.8	10.6	21.3	5.6	2.0
GVA at Basic Prices	35,03,189	35,66,493	37,17,073	20.2	9.3	4.7	12.1	5.5	4.6

Data Source: MOSPI

So, what are the key takeaways from the GVA data for the last 3 quarters? In absolute terms, the GVA at Rs37.17 trillion for Q3FY23 is higher than the GVA for the first two quarters, which was at Rs35.03 trillion and Rs35.66 trillion respectively. The fall in GVA growth rate to 4.6% for Q3FY23 compared to 12.1% in Q1FY23 and 5.5% for Q2FY23 is on account of 3 distinct reasons. 

Firstly, there is the low base effect of the previous year that boosted the GVA growth in the first quarter. The second quarter saw an increase in the base and so the GVA growth has tapered. However, in the third quarter, the growth has tapered further. The second reason is the impact of the global demand slowdown hitting exports. That has dented growth. Thirdly, the biggest hit on GVA came from manufacturing in the third quarter, which was negative at -1.1%. The fall is less than in Q2FY23, but then the second quarter had the distinct advantage of solid growth in the contact sensitive sectors like hotels, trade and tourism. However, barring manufacturing, all other activities have shown growth.

Did inflation impact the GVA growth in Q3FY23?

This has been the trend in the previous quarters, wherein high inflation played a key role in depressing real GVA growth, even as nominal growth remained strong. The table below captures the nominal growth rates in GVA levels for Q1, Q2 and Q3 of FY23 and also shows the yoy growth rate across the board.

Quarterly Estimates of GVA at Basic Prices for Q3 (October-December) 2022-23 (at Current Prices)
Industry classification	2022-23 Q1	2022-23 Q2	2022-23 Q3	2021-22 Q1	2021-22 Q2	2021-22 Q3	2022-23 Q1	2022-23 Q2	2022-23 Q3
Agriculture, Forestry	10,16,463	8,75,540	14,21,565	8.8	8.0	8.5	16.5	13.5	8.6
Mining & Quarrying	1,53,991	1,17,537	1,39,733	42.3	34.4	41.9	69.2	40.3	28.9
Manufacturing	9,00,260	8,76,731	8,47,518	65.1	17.1	11.8	17.5	3.6	2.7
Utilities	1,72,890	1,80,377	1,91,777	8.1	8.4	13.1	40.2	36.2	32.8
Construction	4,65,945	4,38,956	4,88,274	100.5	27.4	15.4	32.8	14.7	11.9
Trade, Hotels, Transport	9,55,665	10,82,028	11,34,569	54.7	23.8	22.1	44.4	29.0	16.5
Financial, Real Estate	14,05,454	14,82,866	11,95,455	12.4	16.7	14.0	20.3	16.5	11.4
Administration, Defence	8,43,775	8,61,455	8,69,823	11.1	22.8	16.8	28.1	12.3	7.9
GVA at Basic Prices	59,14,443	59,15,488	62,88,713	27.6	18.1	14.5	26.0	16.1	10.8

What are the key takeaways from the table above? We can get a picture of the inflation impact on real GVA growth by comparing the nominal growth in GVA with the real growth in GVA. For Q1, Q2 and Q3, the nominal GVA growth has been 26.0%, 16.1% and 10.8% respectively. During the same period, the real GVA growth has been 12.1%, 5.5% and 4.6% respectively. In the first quarter, the inflation deflator was almost 13.9%, which reduced to 10.6% in Q2 and further tapered to 6.2% in Q3 of FY23. What do we make of this data?

Clearly, inflation is playing less of a role in depressing real growth in gross value added (GVA). That means, most of the pressure is coming because the nominal growth is slowing and it is slowing much faster in the last 3 quarters. Even if you discount the base effect, it is evident that manufacturing has grown much less than the rate of inflation in nominal terms and that is putting most of the pressure on the real GVA growth. The reducing inflation impact also means that RBI’s efforts to control inflation with monetary hawkishness are going to be less effective in boosting the real GVA growth.

How the GDP break up looks like in Q3FY23?

For looking at the key drivers of GDP, the nominal GDP is a better measure and that is what we have captured in the table below. 

Quarterly Estimates of Expenditure Components of GDP for Q3 (October-December) 2022-23 (at Current Prices)
Expenditure Components	2022-23 Q1	2022-23 Q2	2022-23 Q3	2021-22 Q1	2021-22 Q2	2021-22 Q3	2022-23 Q1	2022-23 Q2	2022-23 Q3
Private Final Consumption	38,77,316	40,55,798	43,89,388	57.3	61.2	65.1	59.2	61.7	63.3
Government Final Consumption	7,25,465	5,93,988	6,26,059	12.7	10.2	9.5	11.1	9.0	9.0
Gross Fixed Capital Formation	19,03,233	19,09,969	18,58,283	28.1	29.3	26.6	29.1	29.1	26.8
Changes in Stocks (CIS)	44,910	43,737	42,279	0.7	0.7	0.6	0.7	0.7	0.6
Valuables	49,806	1,56,902	67,297	0.6	3.2	1.6	0.8	2.4	1.0
Exports	15,21,259	15,17,626	15,41,435	21.9	21.8	20.9	23.2	23.1	22.2
Imports	17,69,467	19,10,098	18,22,342	22.7	24.3	24.8	27.0	29.1	26.3
Discrepancies	1,94,206	2,01,628	2,35,842	1.3	-2.1	0.4	3.0	3.1	3.4
GDP (Rs in Crore)	65,46,729	65,69,549	69,38,241	100.0	100.0	100.0	100.0	100.0	100.0
GDP   growth yoy (%)	27.8	17.2	11.2

What we can infer from the table above is that the nominal GDP growth rate has fallen from 27.8% in Q1 to 17.2% in Q2 and to 11.2% in Q3. Like in GVA, here also the inflation impact is waning. What are the key trends? If you look at the latest 3 quarters of FY23, it is private final consumption that is driving GDP growth, which is a good sign. Also, there is less of role that government consumption and capital formation are playing in boosting GDP, while the role of trade (exports and imports) is almost static over the last 3 quarters. The GDP story appears to be all about the India consumption story.

GDP numbers and the RBI rate outlook

Will the latest GDP numbers make the RBI more hawkish or dovish? Apparently, there are growth concerns, but consumption is still robust and that is something the RBI may want to contain to curb inflation. Also, in the last few months, the interest rate action is increasingly linked to the inflation expectations and has almost been delinked from growth. For now, it does look like hawkishness is here to stay, notwithstanding tepid GDP growth in Q3FY23. The third quarter GDP is unlikely to change the terminal rate assumptions of the RBI at 7% or higher.