The Indian economy grew at a lower-than-expected 4.4% in the October-December 2022 quarter on the back of a contraction in manufacturing and low growth in consumption, but is still expected to grow by 7% in 2022-23, GDP numbers released by the National Statistical Office (NSO) on Tuesday showed.
The numbers disrupted three key lines of thinking about the Indian economy’s performance: First, the Indian economy has done worse than expected in the last quarter; second, it will (have to) do much better than expected in the ongoing quarter; and third, it has done much better in the last three years than what NSO’s own numbers suggested.
The 4.4% growth for the quarter ending December was lower than the 4.7% projection by a Bloomberg poll of economists. However, the second advance estimates for 2022-23 have retained the 7% growth projection made in the first advance estimates released on January 6. This implies that the Indian economy will actually gain and not lose growth momentum in the quarter ending March 2023 – GDP growth will have to be 5.1% in the March 2023 quarter for the 7% annual growth number to materialise.
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Underscoring that the ministry of statistics and program implementation (MoSPI) has “maintained the real GDP growth forecast for the current financial year at 7%”, chief economic adviser (CEA) V Anantha Nageswaran said that this is “very realistic” and India remains a bright spot among the “large sized economies” with comparatively higher GDP growth and low CPI inflation. According to him, stable economic fundamentals of the Indian economy and limited fallout of current Covid-19 surge in China are the potential upside. He, however, pointed at some downside risks such as global growth being forecasted to slow from 3.4% in 2022 to 2.9% in 2023 as per IMF’s World Economic Outlook, synchronised monetary tightening, adverse spillovers from the prolonged strains in supply chains, and uncertainty due to ongoing geopolitical conflict.
Analysts say that given the growing headwinds to the economy, growth momentum going up in the current quarter is a rather counter-intuitive assumption. The Monetary Policy Committee (MPC) of RBI projected GDP growth rate for the quarters ending December 2022 and March 2023 at 4.4% and 4.2% in its resolution dated December 7, 2022. The February MPC did not make any growth projections for the December 2022 and March 2023 quarter and assumed the 7% growth projection for 2022-23 by NSO as a given.
Statistics released by NSO on February 28 have also made changes to GDP growth numbers for previous years. GDP growth rates for 2019-20, 2020-21 and 2021-22 have been revised upwards from the earlier figures of 3.7%, -6.6% and 8.7% to 3.9%, -5.8% and 9.1% respectively. The revision in the 2020-21 number means that the NSO’s first advance estimate (it was released on January 7, 2021) overestimated the pandemic inflicted contraction by almost two full percentage points.
“The lower-than-expected quarterly numbers have been muddled amid sharp data revisions, usually seen with the release of this print each year; we had seen the same magnitude of revisions in the past two years, which were affected by Covid disruptions”, Madhavi Arora, lead economist, Emkay Global Financial Services said in a note.
The historical revision in past GDP data in NSO’s latest release also means that in absolute terms, real GDP in 2022-23 will be ₹159.7 lakh crore, which is almost ₹2 lakh crore more than what the first advance estimate released on January 6, 2023, projected. This will also lead to a minor increase in per capita GDP which is expected to be ₹1,15,490 in 2022-23 compared to ₹1,13,967 in the first advance estimates.
Beyond the revised numbers, analysts point to areas of concern in the quarter’s data: Private final consumption expenditure (PFCE) grew at just 2.1% in the December 2022 quarter. This number was 8.8% in the September 2022 quarter. Manufacturing suffered an annual contraction for the second consecutive quarter in December 2022, making it the third quarter of contraction in the calendar year 2022. While services continue to be the major driver of overall growth, momentum is slowing even there. The services sector growth slowed down from 9.4% in the September 2022 quarter to 6.2% in the December 2022 quarter. Gross Fixed Capital Formation (GFCF), which measures investment activity in the economy, grew at an impressive 8.3% in the December quarter. To be sure, even GFCF has suffered a slowdown in growth compared to the September 2022 numbers when it was 9.8%. Gross Value Added (GVA) growth in the December 2022 quarter stood at 4.6%, which suggests that production net of taxes grew at a faster rate than overall GDP. While GVA growth normally trails GDP growth, the former has been higher than the latter in 18 out of 43 quarters for which data is available under the current series. To be sure, in absolute terms, GDP number for December 2022 is higher than the corresponding GVA number.
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“India’s economy continues to perform in key private services and agriculture, while manufacturing remains the only area with visible weakness…However, for FY23-24, we continue to expect a soft landing for the economy as tighter monetary conditions and still-elevated inflation take a toll”, Rahul Bajoria, MD & head of EM Asia (ex-China) Economics, Barclays, said in a note. NSO’s latest statistics, analysts believe, will add to the already growing hawkish monetary policy sentiment and increase the possibility of yet another rate hike when the monetary policy committee of RBI meets in April. “Today’s growth number is broadly in line with RBI’s own projections, and is unlikely to shift RBI’s projections materially. Following a set of hawkish minutes and the inflation overshoot in January, we think that the balance of risks has tilted towards another hike. We expect a 25bp hike in April with continued dissent in the MPC”, Bajoria added in his note.
NSO will publish GDP numbers for the quarter ending March 2023 on 31 May, 2023.