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Normalising base to compress YoY GDP growth to 5.1% in Q3 FY23: ICRA

Normalising base to compress YoY GDP growth to 5.1% in Q3 FY2023, even as expansion over pre-Covid levels seen in double digits


Normalising base to compress YoY GDP growth to 5.1% in Q3 FY23: ICRA

ICRA has projected the year-on-year (YoY) growth of GDP in Q3 FY2023 at 5.1%, a base effect-led moderation from the 6.3% recorded in Q2 FY2023. However, the growth in GDP over the pre-Covid levels is expected to improve further to 11.6% in Q3 FY2023 relative to the 7.6% seen in the previous quarter, boosted by continued recovery in the services sector.

Ms. Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA Ltd, said: “Economic activity in Q3 FY2023 remained distinctly uneven, amid the upsides offered by the robust demand for contact-intensive services and upbeat sentiment during the festive season. Trends in Government spending were disparate, with a healthy revenue spending by the Government of India (GoI) amid a base effect led contraction in its capital spending. Similarly, while the services sector exports posted a sharp 25% YoY expansion, non-oil merchandise exports contracted by 8.2% in the same quarter. The advance estimates of kharif production, too, indicate a mixed trend in crop output, with a YoY rise in sugarcane, cotton, coarse cereals and oilseeds, and a decline in rice and pulses. Amid continuing input price pressures for certain sectors, we project the GDP growth in Q3 FY2023 at 5.1%.”

The YoY rise in gross value added (GVA) at basic prices (at constant 2011-12 prices) is anticipated to moderate to 4.9% in Q3 FY2023 from 5.6% in Q2 FY2023. While the growth in the services sector would display a base-effect led moderation (to +7.4% from +9.3%, respectively), it would outpace the rise in agriculture, forestry and fishing (+4.0% in Q3 FY2023) and industry (+1.0% in Q3 FY2023).

The YoY performance of 12 of the 14 high frequency indicators of the services sector expectedly worsened in Q3 FY2023 relative to Q2 FY2023, on a normalising base, even as some contact-intensive sectors saw their performance recovering close to the pre-Covid levels in Q3 FY2023. The YoY growth of the combined revenue expenditure of 22 state governments, for which data is available[1], eased to 5.4% in Q3 FY2023 from 15.9% in Q2 FY2023. However, led by higher release of subsidies, especially to the fertiliser sector, the GoI’s non-interest revenue expenditure expanded by 13.4% in Q3 FY2023 after having contracted by 1.4% in Q2 FY2023. Overall, ICRA projects the GVA growth of the services sector at ~7.4% in Q3 FY2023.

Investment activity was buoyant in Q3 FY2023, with an improved performance of several investment-related indicators relative to Q2 FY2023, such as the output of capital goods (to +8.8% from +6.9%) and infrastructure/construction goods (to +7.3% from +5.3%) and the value of new project announcements (to a three-quarter high of Rs. 6.6 trillion in Q3 FY2023 from Rs. 4.4 trillion in Q2 FY2023). While the aggregate capital outlay of the aforesaid 22 state governments rose by 7.8% YoY during Q3 FY2023, the absolute rise was small (Rs. 85 billion). In contrast, the GoI’s capex contracted by 9.4% YoY in Q3 FY2023 (+42.4% in Q2 FY2023), partly on account of a high base related to Air India’s equity infusion in December 2021 (Rs. 0.6 trillion).

ICRA estimates the industrial GVA to have reverted to a YoY growth of ~1.0% in Q3 FY2023 after the mild 0.8% contraction seen in Q2 FY2023, aided by an improvement in all the four sub-sectors, namely manufacturing (to          -3.0% from -4.3%), mining and quarrying (to +5.0% from -2.8%), electricity, gas, water supply and other utilities (to +7.0% from +5.6%) and construction (to +7.0% from +6.6%). Manufacturing volumes in Q3 FY2023 were partly constrained by the ongoing slowdown in external demand and lag in domestic demand for consumer durables relative to pre-Covid levels, as seen in the decline in output for segments such as textiles, leather products, electrical equipment, etc. Nevertheless, the demand for other goods such as automobiles was robust during the festive season. Some sectors continued to witness margin pressure in Q3 FY2023, with commodity prices appreciably higher than the year-ago levels, which is likely to have weighed on GVA growth.

Based on the mixed trend in the production of kharif crops indicated in the 2nd Advance Estimates for FY2023, ICRA estimates the agri-GVA growth at 4.0% for Q3 FY2023, a slight downtick from the 4.5-4.6% seen in the previous two quarters. Subsequently, higher acreage, early sowing, healthy reservoir levels and improved availability of fertilisers have contributed to the expectation of a record high output of several rabi crops, which should support agri-GVA growth and farm sentiment in Q4 FY2023.

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