State of the economy: What do Q1 GDP estimates suggest?

The National Statistical Office is going to come out with the April-June quarter gross domestic product data on the 31st of August. But, before the official numbers are made public, several projections have come out. The Finance Ministry estimates that the economy grew by around 15.6 per cent in that quarter.

This is lower than the Reserve Bank of India’s Q1FY23 projection. The RBI projects FY23 GDP growth at 7.2 per cent, with Q1 forecast at 16.2 per cent, Q2 at 6.2 per cent, Q3 at 4.1 per cent, and Q4 at 4 per cent.

Most economists also believe that the economy grew at a slower pace than the RBI MPC’s projection for the first quarter. Their projections range between 12.5 per cent and 17.8 per cent.

Double-digit GDP growth in Q1FY23 over the 20.1 per cent growth clocked in Q1FY22 may appear to be quite high. But, that quarter was affected by the second Covid-19 wave. In fact, the economy shrank by 8.5 per cent in Q1FY22 when compared with the corresponding pre-Covid period of FY20.  

Pronab Sen, Country Director for India Programme, International Growth Centre says the economy only grew 0.8-1.2% between FY20 and now. The economy stands where it did in FY20.

Citing a senior official, the Business Standard report on Finance Ministry estimates said that GDP components like Private Final Consumption Expenditure, Gross Fixed Capital Formation, and Government Final Consumption Expenditure showed healthy improvement. But, the trade component was likely affected by high commodity prices and rupee depreciation. While private sector capex has started crowding back in and private consumption has improved despite inflationary pressures, trade has been affected by geopolitical headwinds.

On a related note, with exports growing at a much slower pace compared to imports, the country’s trade deficit widened to a record $30 billion in July. In fact, merchandise exports fell to a five-month low of $36.27 billion in the same month.  

Sen of International Growth Centre says, not too much hope on external front for next 1.5 years. Domestic side is starting to pick up. Which of these two sides moves faster will decide final FY23 growth rate.

Manufacturing, construction, mining, and agriculture, which are the sectors that make up Gross Value Added, are also expected to show healthy growth. Even touch services like tourism, hospitality, and leisure have bounced back from the effects of the pandemic due to pent-up demand. In FY22, all sectors, except trade, hotels and communication services, were above the pre-pandemic levels of FY20.

During its latest rate action in early August, the Reserve Bank of India’s Monetary Policy Committee retained the real GDP growth forecast of 7.2 per cent for the current financial year. Given the changing external and internal picture, there might be a doubt about whether this forecast can be retained going forward. So, what factors will determine the final print for the current financial year?

Madan Sabnavis, Chief Economist at Bank of Baroda says, the bank estimates 7.2% FY23 GDP growth rate. Bit this is not reflective of economic buoyancy. How consumption plays out in coming quarters will determine the final print.

We are back where we stood right before the pandemic hit. The negative effects of the pandemic will continue to play out for years to come, especially for the most vulnerable sections. While India remains one of the fastest growing major economies, it remains to be seen if and when it will hit the sort of economic trajectory required to both heal these scars and meet the considerable challenges that pre-date Covid.