Q1 GDP growth at 13.5% comes in lower than street estimates

GDP for Q1FY23 was estimated at 16.2% by the RBI and at around 15.5% by street estimates. However, the actual GDP growth for Q1FY23 came in relatively lower at 13.5%. In absolute terms, that is still healthy, but clearly the lag effect of the central bank hawkishness, recession fears and the supply chain bottlenecks are starting to show. It remains to be seen if the RBI estimate of full year GDP growth at 7.2% for FY23 can be sustained. However, falling inflation could be a big boost, but more on that later.

It is said that economic parameters are always relative and one must look at yoy growth numbers always pegged to the base period growth. Remember, this 13.5% real GDP growth in Q1FY23 has come on a strong base of 20.1% quarterly GDP growth in Q1FY22. Also, here we are talking about the real GDP, which is net of inflation impact and in the current quarter, inflation has wiped out nearly 13% of nominal growth. As the RBI hawkishness results in more tangible reduction in consumer inflation, GDP gains will be much smarter.

One parameter that has become popular in recent times is the gross value added (GVA), which is GDP shorn of indirect taxes and subsidies. Let us now look at absolute numbers. Real GVA for Q1FY23 came in at Rs34.42 trillion compared to Rs30.53 trillion in Q1FY22; a yoy growth of 12.7%. what about real GDP growth. Q1FY23 real GDP came in at Rs36.85 trillion compared to Rs32.46 trillion in Q1FY22. That explains the real GDP growth of 13.5% in the June 2022 quarter. The message has been that growth is decisive over COVID lows.
 

Private consumption and Imports drove nominal GDP growth

Why must one look at the nominal GDP? Remember, the nominal GDP is the GDP before adjusting for inflation. This is the actual level of economic activity and job creation in the economy. In Q1FY23, the nominal GDP was Rs64.95 trillion ($3.25 trillion annually). Nominal GDP has grown by 26.7% over Q1FY22. This 26.7% nominal GDP growth got reduced to 13.5% real GDP growth due to the inordinately high impact of inflation. Here are the two major drivers of nominal GDP in the June 2022 quarter.

a)    Private final consumption increased yoy from Rs28.47 trillion to Rs39.71 trillion in Q1FY23. Apart from private consumption growing 39.5% yoy, the share of private consumption in GDP is up by a full 560 basis points. That is good news for a domestic consumption led economy like India.

b)    There are signs of a pick-up in the capital investment cycle too. For instance, Gross Fixed Capital Formation is up yoy from Rs14.44 trillion to Rs18.97 trillion in Q1FY23. That is not just impressive growth at 31.4%, but the share of Gross Fixed Capital formation in the overall GDP basket has picked up by 100 bps. That is the encouragement.

c)    Merchandise Exports grew 29.7% yoy and its share in GDP increased by 50 bps. But the pain point is going to be in imports. For example, merchandise Imports grew by a whopping 56.0% yoy on the back of a sharp surge in import value of oil, coal and fertilizers. The share of imports in GDP is up by a staggering 520 bps yoy.
There is some consolation on the private consumption and the capital formation front. However, the surge in exports is not too flattering as it is likely to be a trigger for imported inflation into India.

Primary, secondary and tertiary drivers of GDP in Q1FY23

We will look at GVA since it eliminates the impact of subsidies and indirect taxes in GDP. The GVA growth of 12.7% for Q1FY23 can be broken up into 8 key components as under. 

Data Source: MOSPI

There has been growth across agriculture, industry and services. The growth in contact intensive segments like trade hotels and transport is impressive at 25.7%, but this comes on a very low base and 8 quarters of subdued activity. Manufacturing at 4.8% may be disappointing, especially since it has strong externalities for overall GDP growth.

Let us finally look at the positive side of the story. One has to appreciate this steady growth in GDP considering global headwinds like central bank hawkishness, commodity inflation and supply chain bottlenecks. The big bet is on falling inflation boosting real GDP growth.