Q2 GDP Growth: A sequential recovery, but headwinds ahead
GDP growth in Q2 FY23 stood at 6.3% y-o-y (in line with our forecast) compared to 13.5% in 1. To recall, the first quarter numbers had been bumped up as the low base from the pandemic years had continued to distort the y-o-y figures. From the supply side, GVA (Gross Value Added) growth stood at 5.6% y-o-y (lower than our expectations) widening its gap with GDP growth (70bps) in the second quarter (possibly due to higher tax collections, GDP = GVA + Net Taxes). We are holding on to our FY23 annual GDP forecast of 6.8% and expect growth in Q3 & Q4 to be between 4-4.5%. For FY24, we expect GDP growth of 6.3%, with downside risks to our forecasts. There are risks stemming from the slowdown in global growth and impact of inflation and tighter financial conditions on the consumption recovery. On the policy front, this GDP print does not change our view on RBI’s rate action in December. Inflation remains above the RBI’s upper tolerance band and warrants a further increase in rates.
We continue to expect a 35bps rate hike in the next policy and then a 25bps in the February policy, which would take the policy rate to 6.5% by fiscal year end.
• First the good news. On a sequential basis (q-o-q), growth was in the green in the second quarter – a signal that the economy continued to recover despite global headwinds. GDP growth rose by 3.6% q-o-q in Q2 compared to a contraction of 9.6% in Q1. Secondly, all sectors moved above pre-pandemic output levels. To recall, services like trade, hotels, transport and communications hadn’t yet surpassed pre-covid levels in the last quarter.
• The frontrunners: Agriculture sector recorded growth of 4.6% y-o-y despite the impact of uneven monsoons on kharif production. But the bigger contributor to growth was the services segment that recorded the highest sequential growth in the last three quarters (rose by 8.7% q-o-q in Q2) – clearly reflecting the impact of the re-opening effect.
• But we see signs of stress – ongoing and more to come – in this GDP release. The first disappointment was the sharp contraction in manufacturing GDP which fell by 4.3% y o-y in Q2. Pressure on corporate profitability due to elevated costs and lower exports are likely to have weighed on manufacturing production. Going forward while input costs moderation might support corporate profitability, the slowdown in domestic consumption as well as exports are likely to be headwinds for manufacturing growth. • What about the demand side of the equation? The biggest contributors to GDP growth in Q2 were investment and private consumption and the component “discrepancies”. The latter is usually a residual showing the difference between the production and expenditure approach to calculating GDP (For details on this see RBI’s paper, “Statistical TREASURY RESEARCH 30 Nov 2022 econresearch@hdfcbank.com Classification – Public Classification – Public Discrepancies in GDP Data: Evidence from India”, 2018). Bottomline is that a high discrepancy value does increase the likelihood of revision in the Q2 (overall and internals) numbers in the subsequent releases.
• In terms of drags, government consumption expenditure dropped by -4.4% y-o-y in Q2. While revenue expenditure in H1 FY23 as a % of BE remains in line with the trend last year, the second quarter had a significant base effect from last year pulling down the y o-y growth figures. To recall, the government was slow to spend in Q1 FY22 due to the second wave and had significantly increased its spending in Q2 FY22.
• Finally, as expected net exports continued to be a drag on growth with imports growing faster than exports. Export growth stood at 11.5% y-o-y, getting the bulk of the support from higher services exports. Piecing together the supply and demand side of growth numbers a conclusion that one can draw is that while domestic consumption is leading to higher import growth, it has not translated into a similar recovery in domestic production.
• In nominal terms, GDP growth stood at 16.2% y-o-y in Q2 – lower than Q1 FY23. The GDP deflator moderated to 9.3% in the quarter from 11.6% in Q1 FY23 indicating that prices pressures have perhaps peaked. Going forward, we expect nominal GDP to normalise towards 10% as both WPI and CPI inflation moderate in H2 FY23. GDP & GVA growth trend %y-o-y %yr Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Q1 FY23 Q2 FY23 GVA -21.4 -5.9 2.1 5.7 18.1 8.3 4.7 3.9 12.7 5.6 GDP -23.8 -6.6 0.7 2.5 20.1 8.4 5.4 4.1 13.5 6.3 Supply side Agriculture, Forestry and Fishing 3.0 3.2 4.1 2.8 2.2 3.2 2.5 4.1 4.5 4.6 Industry -33.7 0.6 6.3 13.4 46.6 7.0 0.3 1.3 8.6 -0.8 Mining & Quarrying -17.8 -7.9 -5.3 -3.9 18.0 14.5 9.2 6.7 6.5 -2.8 Manufacturing -31.5 5.2 8.4 15.2 49.0 5.6 0.3 -0.2 4.8 -4.3 Electricity, Gas, Water Supply & Other Utility -14.8 -3.2 1.5 3.2 13.8 8.5 3.7 4.5 14.7 5.6 Construction -49.4 -6.6 6.6 18.3 71.3 8.1 -2.8 2.0 16.8 6.6 Services -20.8 -10.8 -0.9 2.1 10.5 10.2 8.1 5.5 17.6 9.3 Trade, Hotels, Transport, Comm. Etc -49.9 -18.8 -10.1 -3.4 34.3 9.6 6.3 5.3 25.7 14.7 Financial, Real Estate and Professional Services -1.1 -5.2 10.3 8.8 2.3 6.1 4.2 4.3 9.2 7.2 Public Administration, Defence and Other Services -11.4 -10.2 -2.9 1.7 6.2 19.4 16.7 7.7 26.3 6.5 Demand side Private Consumption -23.7 -8.3 0.6 6.5 14.4 10.5 7.4 1.8 25.9 9.7 Govt Consumption 13.6 -22.9 -0.3 29.0 -4.8 8.9 3.0 4.8 1.3 -4.4 GFCF -45.3 -4.5 -0.6 10.1 62.5 14.6 2.1 5.1 20.1 10.4 Exports -25.5 -6.4 -8.6 3.7 40.8 20.7 23.1 16.9 14.7 11.5 Imports -41.1 -17.9 -5.2 11.7 61.1 41.0 33.6 18.0 37.2 25.4 econresearch@hdfcbank.com Classification – Public
Classification – Public Source: CEIC, HDFC Bank Private consumption and investment were the biggest contributors to GDP growth while imports and government consumption were a drag Source: CEIC, HDFC Bank Sequential Growth: Both GDP & GVA recorded positive sequential growth in Q2 FY23 Source: CEIC, HDFC Bank Share of private consumption & investment remained strong Output above pre-pandemic levels across sectors Source: CEIC, HDFC Bank % q-o-q Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Q1 FY23 Q2 FY23 GVA -14.5 8.7 6.2 5.2 -7.2 1.9 GDP -17.1 10.6 6.5 6.7 -9.6 3.6 Manufacturing -14.8 8.3 -5.2 14.2 -10.5 -1.2 Services -12.2 17.0 -2.5 5.4 -2.1 8.7 % share of GDP Q4 FY22 Q1 FY23 Q2 FY23 Private Consumption 55.5 59.9 58.4 Govt Consumption 11.3 11.2 8.8 GFCF 33.6 34.7 34.6 Exports 20.8 22.9 23.3 Imports 25.8 31.0 31.9 Discrepancies 2.1 0.3 2.9 econresearch@hdfcbank.com Classification – Public Classification – Public Treasury Economic Research Team Disclaimer: This document has been prepared for your information only and does not constitute any offer/commitment to transact. Such an offer would be subject to contractual confirmations, satisfactory documentation and prevailing market conditions. Reasonable care has been taken to prepare this document. HDFC Bank and its employees not accept an