Checkout Budget Highlights 2023The moderation in Q3 FY23 GDP growth to 4.4 percent YoY is reminiscent of growth ‘normalising’ and mean reverting to its immediate pre-pandemic trend. Coincidently, it matches exactly the average growth over a four-quarter period in the run-up to the COVID-19 outbreak. Compared to Q2 FY23 growth of 6.3 percent, a base-led deceleration in Q3 was widely anticipated. But, to simply state that growth was slower than market consensus pegged at 4.7 percent (and QuantEco Research estimate of 5.0 percent) may be a naïve and oversimplified conclusion, especially given the revisions to past data.
Below we discuss some of the finer nuances of the Q3 FY23 GDP and second advance estimates (SAE) released for FY23 by the National Statistical Office (NSO).
QoQ Momentum Was Healthy
Sequentially, Q3 FY23 GDP data translates into a healthy momentum of 3.5 percent QoQ, higher than the pre-COVID-19 (spanning 5-years) trend momentum of 2.1 percent typically seen in the third quarter. This matches the buoyancy seen in most high-frequency indicators in Q3 FY23, such as purchasing managers’ index (PMI) for manufacturing and services, generation of e-way bills, and tractor sales among others, catapulted by bunching up of pent-up and festive demand. This is also reaffirmed by the private final consumption expenditure (PFCE) clocking a momentum of 7.3 percent QoQ (though marginally lower than the pre-pandemic average of 8.3 percent but still holding well despite headwinds from high inflation, ongoing monetary tightening, and subdued pace of government’s revenue spending), but the annualised growth being beaten down to 2.1 percent YoY in Q3 versus 8.8 percent in Q2 due to an adverse base.
Services, All The Way…
Manufacturing growth once again underwhelmed, as it contracted for the second consecutive quarter, albeit at a milder pace of 1.1 percent YoY in Q3FY23 compared to 3.6 percent in Q2. The still elevated input costs (notwithstanding the softening in global commodity prices) continuing to keep margins under pressure, coincided with a deceleration in manufacturing exports and overall global growth sentiment in the quarter. For FY23, the manufacturing sector is expected to eke out a mild growth of 0.6 percent as per NSO. What this means is that, the services sector of which contact-intensive services will continue to lead growth, both on a quarterly and annual basis in FY23.
Fertiliser Subsidy Pulls GDP Below GVA Growth In Q3
Concomitant to Q3 GDP growth at 4.4 percent YoY, GVA growth stands higher at 4.6 percent. The difference between the two is essentially ‘net indirect taxes’ i.e., indirect taxes minus subsidies. While the run rate of indirect taxes remained healthy in Q3 FY23 driven primarily by GST collections, the payout on subsidies, of which urea-based fertiliser subsidy was substantially higher. As per Controller General of Accounts (CGA) data on April-December basis, total subsidy outgo registered a jump of 29 percent over the corresponding period last year, with urea-based fertiliser subsidy accounting for 92 percent of the increase.
Government Spending: Giveth Some, Taketh Some
On the sectoral side, growth in public administration, defence and other services decelerated to a two-year low of 2.0 percent YoY in Q3 versus 5.6 percent in Q2. This slowdown can be somewhat better explained on the expenditure side – which saw government final consumption expenditure (GFCE) contract for the second consecutive quarter but gross fixed capital formation (GFCF i.e., investments) registering yet another healthy print of 8.3 percent YoY in Q3 FY23.
The milder contraction of 0.8 percent YoY in GFCF in Q3 versus 4.1 percent in Q2 is in line with central government revenue expenditure minus interest and subsidy payout, which swung from a de-growth of 13.2 percent YoY in Q2 to an expansion of 2.2 percent in Q3 FY23. States’ slower pace of revenue expenditure could perhaps have exacerbated the weakness. The strength in GFCF, on the other hand, is conjectured to have been driven by lagged impact of government capex, as a well-rounded private sector investment cycle still remains at abeyance.
COVID Impact Milder Than Envisaged Earlier
Revision to past data for FY21 and FY22 indicate a milder impact of COVID-19 on GDP growth than envisaged earlier. For FY21, the contraction in growth was revised lower to 5.7 percent from 6.6 percent earlier, while the rebound for FY22 was revised upwards to 9.1 percent from 8.7 percent earlier. This essentially means that despite a shallower trough in FY21, FY22 growth recovery was more upbeat.
Revisions To Past Data: It’s Complicated!
Ideally, the upward revision to FY22 GDP growth should have implications for FY23 – ceteris paribas, FY23 growth projection should have been revised lower. However, NSO has retained FY23 GDP growth projection at 7.0 percent - the same as the First Advance Estimate (FAE), released almost two months back on January 7, 2023. The unchanged FY23 GDP projection can be explained by – one, an upward revision to a majority of sub-sectors' GVA growth for FY23 in SAE versus FAE. Two, a higher growth in ‘net indirect taxes’, now projected at 11.6 percent YoY versus 9.9 percent as per FAE.
Another point worthy of highlighting is that the absolute level of Q3 FY23 GDP was in line with our expectations. What this means is that in absence of revision to past data, Q3FY23 GDP growth would have been at 5.1 percent YoY - in line with our projected number of 5.0 percent.
Downside Risks To NSO’s FY23 GDP Estimate
The imputed Q4 FY23 GDP growth, basis Q1 to Q3 quarterly and full FY23 NSO data, is estimated at 5.1 percent YoY. The accompanying incremental momentum stands at 7.6 percent QoQ – i.e., above the pre-COVID-19 average pace (spanning 5 years) of 6.3 percent QoQ.
We believe that there could be downside risks to this estimated pace of Q4 GDP growth amidst – (i) Continued waning of pent-up demand (no festive season support akin to Q3) (ii) Gradual impact of cumulative 250 bps of rate tightening pinching borrowers (iii) Early onset of summer imparting a downside to agriculture/wheat output and (iv) Slowdown in exports led by manufacturing. Having said so, the typical bunching up of government capex in Q4 could provide some cushion.
As such, we continue to hold on to our FY23 GDP growth estimate of 6.8 percent YoY - which implies Q4 FY23 growth of 4.4 percent YoY - i.e., same as Q3.
RBI To Remain Focused On Inflation
If anything, Q3 FY23 GDP growth matches RBI’s projected estimate for the quarter. The in-line growth juxtaposed against the upside in January 2023 CPI inflation reaffirms our call of a 25-bps hike in April 2023, with the monetary policy committee (MPC) hawks outweighing the doves. With the US Fed not yet pressing the pause button on its rate hike cycle, the MPC could remain cautious and be non-committal on imprinting the expectation of a premature pause in the market psyche.
FY24 GDP Growth To Moderate
For FY24, we estimate GDP growth at 6.0 percent amidst a slowing global economy, an anticipated moderation in urban leveraged consumption and a cutback in real revenue spending by the central government. Climate risks from an exceptionally warm February 2023 and the possibility of El Nino developing over the months of the southwest monsoon (i.e., July-September) will remain on close watch. Having said so, an anticipated recovery in rural demand and continued support from government capex are to be seen as growth anchors.
Yuvika Singhal is Co-head of Research at QuantEco Research. Views are personal, and do not represent the stand of this publication.