India's Q1 GDP grows at 13.5%: What does it mean?

India’s Gross Domestic Product grew 13.5% in the first quarter of FY22-23 compared to a year ago helped by the base effect, thereby registering the fastest growth in four quarters.  

But the numbers came in below the 15.2% forecast by economists, and much lower than the Monetary Policy Committee’s projection of 16.2%.

The last time India’s economy grew faster was in Q1 FY21, when it gained 20.1% from the pandemic-depressed level a year earlier.

With rising interest rates, uneven monsoon and slowing global demand, analysts fear the economy may fall short of the 7.2 per cent annual growth target for FY23 projected by the Reserve Bank of India.  

The GDP during April-June 2022 stood at Rs 36.85 trillion, compared to Rs 35.49 lakh crore in the corresponding quarter of the pre-pandemic year 2019-20.

This means, the country’s economy has grown at an average of 1.26% a year in real terms over the past three years.

On a sequential basis, GDP in the first quarter contracted 9.6% from the preceding three-month period. According to Sachchidanand Shukla, Group Chief Economist at Mahindra and Mahindra, this is three times the average sequential contraction of 3.2% witnessed in the first quarter of each of the last five years before the pandemic.

But, the year-over-year growth in GDP was led by consumption and investments, which grew 25.9% and 20.1%, respectively. The growth in government expenditure was a weak 1.3%.

Looking at the sectoral trends, the GVA growth in manufacturing was 6.5, while the construction sector grew 16.8%. The labour-intensive trade, hotels and transport segment showed a strong 25.7% growth.

The data released by the National Statistical Office showed while the services sector lifted growth during the quarter, activity in the trade, hotels, and transport segment, despite heightened betterment in hospitality, was below the pre-pandemic level of the June quarter of FY20.

Aditi Nayar, Chief Economist at ICRA however said that relative to the pre-Covid level, this stood out as the only sub-sector reporting a contraction in Q1, in line with the robust but incomplete recovery in contact-intensive sectors.

Madan Sabnavis, Chief Economist, Bank of Baroda says, coming off a low base, one shouldn’t reach much in the 13.5% number. Agri, real estate, finance and govt sectors contributed to the growth. Pvt investment and consumption should sustain for 7.2% annual growth. Pent-up demand could get diluted due to high inflation. 

Inflation remains one of the biggest risks as it impacts consumer spending, which accounts for about 60% of India’s nominal GDP. There is also a possibility of slippages in terms of rice and pulses production if the area under cultivation is lower than normal. This can result in further price shocks if sowing doesn’t see a recovery. On the fiscal side, buoyancy in tax collection will give enough comfort to the government in terms of budget management. 

Aurodeep Nandi, India economist and vice president at Nomura said even if one were to discount the low base, this marks a stellar rise in sequential momentum with post pandemic tailwinds lifting GDP growth in June quarter.
 

As the year progresses, experts say that that slowing global growth, higher inflation, and tightening financial conditions will impact the pace of growth.