What the first quarter’s GDP numbers reveal: The new growth normal

In the past three financial years, this was the only first quarter that was not functionally disrupted by Covid-19. The pandemic had struck in the first quarter of 2020-21, and a stringent lockdown imposed to tackle it hit the economy hard. The first quarter of the next year saw a ferocious delta wave, which overwhelmed the healthcare ecosystem more than the economy.

In contrast, economic activity in the first quarter of this fiscal was near normal with the Omicron variant proving to be milder. Moreover, vaccinations and learning to live with the virus have meant progressively less-stringent lockdowns. Google mobility indicators have also been above pre-pandemic levels. These factors enabled contact-intensive services (trade, hotels, transport) to stage a strong comeback (growing at 25.7 per cent) over a low base. However, the sector still trails pre-pandemic levels. But growth this time was not all about a weak base-effect and the rebound in services. There was sequential growth (in the seasonally adjusted series) despite the after-effects of the conflict in Europe.

The spike in commodity prices, crude oil in particular, has raised input costs for producers and pushed consumer inflation way above the RBI’s comfort zone. At 11.6 per cent, the GDP deflator, which captures movements in wholesale and consumer prices was the highest since the pandemic began. High inflation also meant a nominal GDP growth of 26.7 per cent in the first quarter. This, together with improved compliance, has led to very healthy growth in tax collections. Net direct tax collections have surged 41.3 per cent, and indirect tax collections have grown at 9.4 per cent in the first quarter.

This provided the government the wherewithal to invest without derailing the fisc. Central government capex grew at 57 per cent in the first quarter. However, government consumption, which accounts for around 11 per cent of GDP, grew at an anaemic 1.3 per cent during the April-June quarter over a very weak base. But the fact that government holds significant cash balances with the RBI reflects its ability to ramp up consumption expenditure as well.

But rising inflation has led to an abrupt shift in the stance of the monetary policy committee, which delivered a surprise rate hike in May and followed it with two more hikes in June and August. The impact of this was not felt on inflation in the first quarter as it takes eight to nine months — according to the RBI — to impact. CRISIL’s Financial Conditions Index shows that despite the tightening, there is unlikely to be a material impact on economic activity yet. But rising input costs did trim the margins of companies, which resulted in the manufacturing sector registering a mediocre performance.

Private consumption, which accounts for a sizeable chunk of demand-side GDP and was the slowest to recover, has improved markedly. Growing at 26 per cent in the first quarter, it now accounts for 59.9 per cent of the GDP. This is consistent with the improvement in the consumer confidence shown by RBI surveys after the historic low recorded in July 2021. Yet, overall consumer confidence remains in the pessimistic zone, which is not surprising given that high inflation destroys purchasing power, particularly of low-income groups.

A deeper look at the data reveals unevenness with rural economic activity trailing urban. Flat rural wages and increased demand for MGNREGA work confirm this. Fast-moving consumer goods (FMCG) companies have reported a fall in volumes. Additionally, the hinterland is facing relatively higher inflation.

The urban side is relatively better because bulk of the contact-based services (which are largely urban centric) are showing strong growth. The automobile sector has been in the news due to brisk passenger vehicle sales and long waiting periods. But the pickup is skewed and reflects the K-shaped recovery in incomes. The mid- to high-end passenger vehicles are doing well relative to entry-level cars and two-wheelers.

Investments have done somewhat better since the pandemic struck. The share of gross fixed capital formation (GFCF) or investments in the economy rose to 32.5 per cent of GDP in 2021-22, up from 30.5 per cent in 2020-21. In the first quarter of 2022-23, the investment ratio was at 34.7 per cent.

Improving capacity utilisation and healthy financial profiles of corporates augur well for investments. As per our assessment while capacity utilisation is improving, it varies across segments. Recovery trends between infrastructure-linked sectors and industrial verticals are different. Utilisation in infrastructure sectors (benefiting from government investments) such as steel and cement has rebounded strongly in line with economic recovery, but other segments such as some auto categories trail their long-term averages.

In steel and cement, CRISIL Research estimates capacity utilisation at 75-80 per cent and 65-70 per cent, respectively, this fiscal, enough to trigger investments. But, that’s not the case for two-wheelers and entry-level cars. As economic uncertainty holds back the unleashing of the private sector’s animal spirits, the burden of driving investments continues to fall on the government’s shoulders. States will have to ramp up investments in line with the Centre. In the first quarter, state capex (for 16 major states) was 6 per cent below last year.

The recent fall in crude oil and commodity prices, if sustained, augurs well for the economy. But slowing global growth will trim exports and expand the current account deficit. Global growth faces multiple headwinds including a decisive shift in the monetary policy stance towards taming inflation rather than supporting growth in many economies. Exports are already facing the brunt of a global slowdown. This will spill over to the next year as well. A depreciating rupee may not support India’s overall exports much as they are more responsive to trends in global growth. Sticky imports (generally immune to price fluctuation) are growing at a fast clip. So, the trade will on balance drag the GDP, much more than it did last year.

In the coming quarters we will see growth normalising to lower levels as the base effect fades. The under performance in the first quarter has created a downward bias to our growth forecast of 7.3 per cent for the current year. Maintaining the growth momentum next year could be more challenging with global growth slowing and the lagged impact of monetary tightening being felt in the economy.

The writer is Chief Economist, CRISIL Ltd