What is the state of the Indian economy today?

Going ahead, growth rates may moderate on a year-on-year basis. However, the performance relative to pre-Covid levels is expected to improve

India’s Gross Domestic Product (GDP) expanded by 13.5% on a year-on-year (YoY) basis in the first quarter (Q1) of the fiscal year (FY) 2023, largely in line with our projections. The double-digit growth number was driven by a low base, owing to the Delta wave of Covid-19 in Q1 FY 2022. But the real GDP was a mild 3.8% higher than the pre-Covid-19 levels of Q1 FY 2020, implying an annualised growth rate of 1.3% over the past three years. Going ahead, growth rates will certainly moderate on a YoY basis as the base normalises. However, the performance relative to pre-Covid-19 levels is expected to improve.

GDP growth in the previous quarter was driven by a surge in consumption demand, with private final consumption expenditure (PFCE) surging by 25.9% YoY — this alone contributed as much as 14 percentage points to the headline GDP growth number of 13.5%, with higher net imports offsetting the contribution of all the other GDP components. (AP)

GDP growth in the previous quarter was driven by a surge in consumption demand, with private final consumption expenditure (PFCE) surging by 25.9% YoY — this alone contributed as much as 14 percentage points to the headline GDP growth number of 13.5%, with higher net imports offsetting the contribution of all the other GDP components. PFCE exceeded pre-Covid-19 levels by a healthy 9.9% in Q1 FY2023, particularly driven by contact-intensive services that had to be avoided during the pandemic, such as travel, recreation and education. But on the other hand, high inflation constrained discretionary consumption of goods.

These trends were also reflected in the growth of the services sub-sectors on the production side. The trade, hotels, transport, communication and services related to broadcasting (THTCS), and public administration, defence and other services (PADOS) rose by a sharp 25.7% and 26.3%, respectively, on a YoY basis in Q1 FY2023. Nevertheless, recovery in THTCS, which was the worst-affected sector during the pandemic, remains incomplete, with this segment trailing pre-Covid-19 levels by a considerable 15.5% in the quarter.

Moreover, the Gross Value Added (GVA) growth in the industrial sub-sub sectors such as manufacturing and mining trailed their respective volume growth, as indicated by the Index of Industrial Production (IIP) data, reflecting the painful impact of elevated commodity prices on business margins in the quarter.

Looking ahead, the trickle of high-frequency data for July-August 2022 provides some glimpses into how Q2 FY2023 may pan out. While most indicators are displaying a slowing YoY growth, the pace of expansion remains highly uneven across sectors. Moreover, the moderation in commodity prices from their June 2022 peaks, offers a glimmer of hope on producers’ margins, which had come under a great deal of pressure in the previous quarter.

The ICRA Business Activity Monitor — an index of high frequency economic indicators — had fallen by 2.6% on a month-on-month (MoM) basis to a five-month low of 113.5 in July 2022, as excess rains impacted electricity generation, coal output (and thereby rail freight traffic) and diesel consumption. In addition, a normalising base had halved the YoY growth in the index to 11% in July 2022 from 22% in June 2022.

Three things are important to note.

One, that the Government of India’s total expenditure contracted by 2% in the month of July 2022, with a YoY doubling of capital spending being counteracted by a 12% fall in revenue expenditure.

Two, that recently released data for the core sector output reveals a slide in the pace of expansion to 4.5% in July 2022 from an average of 16.2% in May-June 2022, with all the constituent sub-sectors, except steel, witnessing a deceleration. Thereafter, the growth in electricity consumption sunk to a marginal 0.5% in August 2022 from 2.3% in July 2022, although this follows from the heavy rainfall in the just concluded month vis-à-vis August 2021. Further, Coal India’s output shows a moderation in expansion in August 2022 compared to the levels seen in July 2022, while remaining robust at well above 20%, in spite of the above-normal rainfall.

And three, the India Meteorological Department (IMD) projected rainfall above 109% of the long-period average (LPA) in September 2022 after a 7% surplus during June-August 2022. This belies its earlier expectation of an early withdrawal of the southwest monsoon from some parts of the country during the first week of the month. Rainfall that is too high may damage the standing crop, thereby squeezing yields, delaying the harvest and posing downside risks to the kharif harvest.

On balance, we expect a statistical moderation in the YoY GDP growth to 6.5-7.0% in the second quarter and further to 5.0-5.5% in the second half of the fiscal year, on account of a normalising base. Nevertheless, the extent of the expansion — relative to the corresponding pre-Covid-19 quarters of FY2020 is expected to widen sequentially — to low double-digits in the third and fourth quarters, aided by the contact-intensive segments. This, we believe, is a better barometer of the extent of economic recovery, rather than the YoY prints, which are distorted on account of the timing of the Covid-19 waves that the country witnessed over the last two years.

Finally, with the Q1 numbers in line with our forecast, we are maintaining our full year FY2023 growth projection at 7.2%.

Aditi Nayar is chief economist, ICRA The views expressed are personal