13.5% growth hides warts

The 13.5% print is lower than consensus estimates, and more so, when compared with the Reserve Bank of India's Q1 forecast of 16.2%

When was the last time you saw a 13.5 per cent real GDP growth number in a quarter and yet most people were feeling disappointed? Well, blame it on statistical constructs and sizeable base effects wrought by the pandemic, which make interpreting the data, even after 2 years of the pandemic, really tricky. Admittedly, the pandemic has complicated the measurement of a host of economic statistics, especially in gauging the bedrock of all economic analysis: inflation and GDP.

Talking of the Q1FY23 GDP numbers, the 13.5 per cent print is lower than consensus estimates, and more so, when compared with the Reserve Bank of India’s (RBI’s) Q1 forecast of 16.2 per cent. A low base created by a sharp slowdown in economic activity in the same period last year, amid a devastating Delta wave, inflated the current growth numbers. Sample this: The favourable base added a massive 1,800 basis points to the double-digit annualised growth in Q1FY23! In fact, a closer look at the data reveals a sharp slowdown in economic activity sequentially, with a sharp contraction of 9.6 per cent quarter-on-quarter (QoQ) in Q1FY23. Historically, the Indian economy has often contracted sequentially in the first quarter, given seasonal factors. However, the sequential contraction in Q1FY23 is three times the average sequential contraction of 3.2 per cent witnessed in the first quarter of each of the last five years before the pandemic (FY15-FY19). The higher-than-average sequential contraction reveals hidden fault lines within the statistical illusion of high growth. K-shaped recovery in consumption, external sector vulnerabilities amid global uncertainties, and uneven distribution of monsoon are some fault lines in the current economic recovery.

On the expenditure side, the growth was led by a pick-up in consumption expenditure and investments, which grew by 25.9 per cent and 20.1 per cent year-on-year (YoY), respectively. However, the growth in government expenditure was somewhat muted at 1.3 per cent. This moderation in government expenditure was largely expected as the April- June quarter of last year required significant revenue expenditure to support the economy when the Delta wave hit home. However, the external sector remained under pressure as import growth outpaced export. Imports in Q1FY23 grew by 37.2 per cent, more than double the growth of exports at 14.7 per cent. Supply-side shocks, first from the pandemic-related disruptions and followed by the war in Ukraine, kept import prices high. However, the export momentum slowed due to erosion of real purchasing power and economic slowdown in the developed world. At a sectoral level, services and industries witnessed high growth of 17.6 per cent and 8.6 per cent, respectively. Agriculture growth came in at 4.5 per cent, which is the highest in the last eight quarters.

Going ahead, we expect annualised growth to slow down as the base effect turns adverse in the coming quarters. The adverse base effect will reduce the annualised growth rate of Q2, Q3 and Q4 by about 10 per cent, 6.3 per cent and 6.5 per cent, respectively. As the base turns adverse, most of the growth will have to be driven by the sequential recovery of the economic activity. The demand from the bottom of the pyramid, which constitutes a bulk of the private consumption, continues to remain weak. On the one hand, revenge consumption, backed by forced savings and a positive wealth effect, resulted in growing consumer demand from the affluent class. On the other hand, inflation and income shock are manifesting in ‘downtrading’ & ‘shrinkflation’ at the bottom of the pyramid.

The external sector is also expected to remain under pressure throughout this fiscal year. There are tell-tale signs of demand destruction across the globe. The growth in advanced economies more than halved in 2022 versus 2021, and is set to halve again in 2023, according to the International Monetary Fund. The US Federal Reserve has all but abandoned soft-landing as a goal, which means they will have to engineer a sharp recession. And in fact, the US is already under ‘technical recession’ after two consecutive quarters of economic contraction. China’s GDP expanded by a mere 0.4 per cent in Q2CY2022, yet policymakers signalled they would eschew a big economic stimulus and continue their zero-Covid policy. Ideally, with such global growth worries, energy prices should have softened considerably, but geopolitical uncertainties have kept them elevated. Brent oil prices are back to $100/bbl levels and with a tighter energy market and the ongoing Ukraine-Russia war, the prospects of a further rise in energy prices cannot be ruled out as winter arrives in Europe and North America.

So what are the implications? 

We must treat quarterly and yearly economic data with more caution than usual. Importantly, it becomes extremely challenging to extract the signal from the noise in the data for the policymakers. The key implications are that lower than expected growth prints heighten the risk of economic growth of FY23 slipping below 7 per cent and the economy is now a mere 4 per cent above the pre-pandemic level on a real basis; key engines of growth i.e. private consumption, private capex, and the external sector remain weak; and the double-digit numbers conceal the real state of labour market and the informal sector. 

All of this means that going ahead, the government will have to do the bulk of the heavy lifting and the pace of ongoing economic recovery will depend on the government’s ability to drive spending, mainly in terms of infrastructure, as well as welfare measures, to support the rural and informal economy.  Moreover, the RBI will have to temper its rate of policy tightening and maintain adequate liquidity amid elevated domestic and global concerns.

With inputs from Sarbartho Mukherjee, economist, M&M; views expressed are personal