India's Q3 GDP numbers: Testing growth guardrails

One needs to be mindful of two aspects while interpreting Q3 FY23 growth numbers. The pick-up in activity was back-ended in 2020 and 2021 as lockdowns/curbs at the start of the year were eased through the next few months, lifting output by end-year, in effect posing considerable base effects to the December 2022 quarter. Add to that, Revised Estimates for the past two years were released concurrently, influencing the historical quarterly trend.

In this regard, the Revised Estimates for FY22 GDP growth was raised by 40 basis points (bps) to 9.1 per cent, in essence lifting the comparative base versus FY23. The FY21 print was also increased by 90 bps to -5.7 per cent. Absolute numbers

(in rupee terms) for Q3 FY21 were also revised up a notch. Against this backdrop, the actual real GDP growth for Q3 FY23 at 4.4 per cent was a small miss compared to our forecast. Growth relative to pre-Covid level (Q3FY20) stands at 12 per cent increase in Q3 FY23.

Under the hood, contribution to the headline GVA from the farm sector, industry, and construction rose versus the second quarter, while heavyweight services slowed. Core GVA, which excludes farm and government sector, eased to 5.4 per cent year-on-year (YoY) from 6 per cent in Q2 FY23, signaling softer private sector participation.

Under real GDP, domestic demand (consumption and investment) slowed from 7.8 per cent in Q2 to 3.7 per cent in Q3, while less negative net exports emerged as a smaller drag on the headline figure. The positive wedge between Q3 headline GVA growth versus real GDP likely reflects higher subsidy payouts in the period.

Beyond dissecting the backward-looking data, we flag – three plus, one minus and a risk – that will influence the quarters ahead, helping to keep average FY24 growth around 5.5-6.0 per cent, rather than a weaker 5.0-5.5 per cent range.

First, the FY24 Budget retained its pro-growth flavour, channelling bulk of the projected savings in revenue expenditure on higher capex disbursements. For instance, allocation towards roads and highways is expected to rise by a CAGR of 28 per cent in the five years to FY24, besides Railways at over 30 per cent (partly off-budget brought on to the books).

Next, the external trade sector is set to enjoy a few tailwinds, especially in terms of trade relief on energy commodities. The Bloomberg commodities and CRB spot metal indices are down 14-15 per cent from their May 2022 highs. Separately, the benchmark Brent is down by 30 per cent from mid-2022, with the UN Food and Agriculture index also registering a double-digit fall from Q1FY22 high. With key trading markets expected to skirt recessionary conditions (positive beta to India’s trend), as well as timely improvement in relative rupee competitiveness, the extent of deterioration in the current account is set to narrow.

Adding to this, services trade surplus settled at a higher $15-16 billion surplus in December 2022-January 2023 versus an average $10.6 bn in January-November 2022, likely on stronger computer and software exports, suggesting that these receipts will be able to offset a bigger proportion of goods trade deficit going forward.

Lastly, our event study, which covers the last five election cycles, shows that growth typically rises into the election period and in the three quarters after, sees a brief pullback, followed by an uptrend, taking growth up an average 60-80 bps. This average arguably masks changes in business cycles that precede each of these elections, particularly the 2019 trend growth, which was impacted by crisis in the non-banking space, falling savings, and tepid export growth, coupled with onset of the pandemic late in that fiscal year. In late FY24, barring any ‘unknown unknowns’, trend growth should rise.

One minus is that aggregate private sector capex participation will lag, barring few sectoral pockets.

Firms deleveraged through the pandemic, helped by a lift in profits due to accelerated formalisation and better market share, which allowed companies to pare their debt and strengthen balance sheets.

With borrowings rising in the past year and narrower margins to moot, the scale of deleveraging is likely to slow. A recent RBI survey showed operating profits to sales for smaller firms (paid up capital of less than Rs 5 crore) is moderating at a faster pace than that of larger firms, showing asymmetric impact in this business cycle.

One risk is from the labour-intensive farm sector, where output remains exposed to weather vagaries, notwithstanding a consistent increase in the proportion of gross irrigated land. The IMD has cautioned about “enhanced probability” of a heatwave from March to May in parts of the country. A key offset is that the share of allied sectors (livestock, forestry and logging, etc.), besides non-farm (construction, manufacturing, etc.) has been steadily rising, accounting for two-thirds of total rural output. Yet, hurt to agricultural production will have ripple effects on incomes, inflation, growth, and macro balances, warranting caution.

The author is senior economist, DBS Bank