India's Q1 GDP: Disappointing numbers

Lower than expected growth poses hard questions

The National Statistical Office, which is under the Union Ministry of Statistics & Programme Implementation, has released its estimates for gross domestic product (GDP) in the first quarter (Q1) of this fiscal year, 2022-23. The headline number is that GDP at constant prices in the first quarter showed 13.5 per cent growth year on year. This is a deceptively high level, given the base effect. It needs to be remembered that the equivalent quarter of the previous year, April-June 2021, was when the devastating second wave of the coronavirus epidemic was raging through the country. Even though there was no national lockdown as draconian as that observed during the first wave in 2020, activity nevertheless slowed considerably as a consequence of the high mortality and sickness. Given the base effect, the growth rate of 13.5 per cent is in fact a clear disappointment. Most expectations were for quarterly GDP growth in the 15-16 per cent range year on year.

The Reserve Bank of India’s  (RBI’s) projection was for growth in the first quarter to be 16.2 per cent. Thus, growth momentum in the economy is significantly lower than believed. This presents a worrying prospect for investors and the government. One way of seeing how low the growth momentum is, even given the recovery, is to look at real GDP levels for the current year and those prior to the pandemic. Even if the two pandemic years of 2020 and 2021 are written off, Q1 real GDP in 2022-23 is only 3.8 per cent higher than in the equivalent quarter of 2019-20. This could suggest that either recovery is not broad-based, or that there are serious problems with India’s growth engine even aside from the effects of the pandemic. Most likely, it is a combination of the two.

What should be of real concern, given these disappointing numbers, and what they say about Indian growth momentum is that things are unlikely to get better over the rest of the fiscal year. First of all, the base effect will of course dissipate as the year progresses. The RBI, for instance, expects the quarterly growth number to come down to about 4 per cent in the second half of the fiscal year. If this deceleration is borne out, then full-year GDP growth cannot be expected to even cross 7 per cent, let alone the 7.2 per cent projected by the RBI. The core sector data for July has also been released, and it shows a modest growth rate of 4.5 per cent. This links up to the sectoral growth figure for manufacturing in Q1, which showed only a 4.8 per cent increase, year on year, off a weak base. These substantiate concern about the growth momentum in the economy.

The final concern is that over the past months global headwinds have intensified. The recent convocation of central bankers at Jackson Hole made it clear that interest rate conditions were likely to stay tight, which would in turn lead to much tighter capital flows into India. Supply-chain problems, long-term reconfigurations, and geopolitical tensions will continue to keep commodity prices, including those of energy, at elevated levels. Under such conditions both growth-promoting policy and monetary actions are immensely complex. The government must focus on returning growth momentum to the economy through broad-based reforms.