Q2FY23 GDP at 6.3 percent, beats street estimates

How Gross Value Added (GVA) panned out in Q2FY23?

The Q2FY23 GDP growth estimate at 6.3% may look rather dismal compared to the 8.7% growth achieved in FY22 and the impressive 13.5% in the first quarter, Q1FY23. However, it must be remembered that Q2FY23 had several strong global headwinds. The inflation levels had gone up sharply and central banks were in the midst of rapid tightening. Global fears of recession was compressing global demand, hitting exports, while input and interest costs were escalating for Indian corporates. That is the background to Q2FY23.

The Q2FY23 GDP at 6.3% was exactly as projected by RBI but slightly better than the consensus estimates of Reuters and Bloomberg, which veered closer to 6.2%. In fact, most of the research outfits had pegged the second quarter GDP to grow between 5.6% and 6%, so the final number at 6.3% is much better than anticipated. However, the real GDP growth continues to take an inordinate hit on account of inflation. 

The real GDP growth is nominal growth minus the rate of inflation. For Q2FY23, the nominal GDP at Rs65.31 trillion was 16.2% higher on a yoy basis. However, the real GDP at Rs38.17 trillion was up just about 6.3% on a yoy basis. That means, most of the damage to real GDP growth was caused by high inflation. It also logically follows that once inflation levels are tamed, it will have a multiplier effect on the real GDP growth in coming quarters.

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How Gross Value Added (GVA) panned out in Q2FY23?

The gross value added (GVA) has emerged as an important alternative measure to GDP. The GVA is nothing but the GDP adjusted for the impact of indirect taxes and subsidies. In short, the GVA gives a more realistic and output driven picture of macroeconomic growth. In the Indian context, the GVA growth always tends to be less than GDP growth as indirect taxes and subsidies account for a major chunk of the total output value. 

Let us look at how the India's GVA has grown compared to the corresponding previous quarters. Q2FY23 GVA stands at Rs35.06 trillion compared to Rs33.19 trillion in Q2FY22, implying yoy real GVA growth of 5.6%. Let us also look at how the GVA has grown compared to Q2FY21. The Q2FY21 GVA stands at Rs30.65 trillion in Q1FY21, implying real GVA growth of 14.8% over a 2-year period. 

The table below captures the gist of the GVA growth which gives a picture of how the sectoral growth in the quarter was driven.

Data Source: MOSPI

What are the key takeaways from the GVA data above?

1. For the second quarter, agriculture continues to remain robust at 4.6% growth. This aggressive growth in farm output has been largely driven  by better than expected MSP offered by the government over the last few years. Q2 agriculture output has been strong despite reduced acreage in key items like rice production.
    
2. Manufacturing appears to be the big issue, contracting at -4.3% for the second quarter. Clearly, the combination of higher input costs, supply chain constraints, recession concerns and higher cost of funds are forcing companies to go slow on manufacturing. The stress was also visible in the quarterly results of key Indian corporates.
    
3. Services stood out as the redeeming feature growing at over 9% across services. Trade, hotels and transport saw the best growth of 14.7% despite a robust base, as the contact intensive sectors are seeing a strong recovery with a lot of pent-up demand and revenge spending visible. Services have largely driven economic growth in Q2FY23

The quick reaction is that the GDP for Q2 may not be too impressive, standalone. However, considering the circumstances and the expectations, Q2 has been a good deal for India.

Major drivers of nominal GDP in Q2FY23

Nominal GDP is the GDP before adjusting for inflation and is significant as it shows the level of economic activity and creation of jobs in the economy. For Q2FY23, the nominal GDP was Rs65.31 trillion, which is a yoy growth of 16.2%. On a pre-COVID 2-year basis, nominal GDP grew 38.3%. Here are the key drivers.

1. Private final consumption continues to be the key driver of nominal GDP growth. On a yoy basis, share of private final consumption is up 210 basis points at 61.6%, while the share of private final consumption is up 50 bps on a sequential basis.
    
2. The share of government expenditure to GDP has fallen to single digits at 9.2% and is the lowest in the last few quarters. It is a good sign that the government is not being relied upon as a growth driver for the economy.
    
3. Gross Fixed Capital Formation has stayed constant at around 29.6% in terms of contribution to the GDP. That figure is likely to improve only once the capital investment cycle revives, which possibly calls for lower rates of interest.
    
4. Merchandise trade has depressed the GDP in Q2FY23. The share of imports in GDP has risen much more sharply compared to the share of exports. 

That is the gist of the GDP story. The 6.3% GDP growth is amidst trying times and promises full year FY23 GDP growth of around 7.0% to 7.3%. That will still make India the fastest growing large economy in the world with a 400 bps gap over China.