Friday, Dec 02, 2022

First-quarter GDP up 13.5%, lower than RBI estimate

Household spend, investment spur fastest y-o-y growth in four quarters

Going forward, looming headwinds are predicted, including the worsening global growth prospects, the impact of rising inflation on consumption, and the progressive hike in interest rates that could end up denting the growth momentum as the year progresses.

India’s economy grew 13.5 per cent from a year ago in the April-June quarter this fiscal, its fastest year-on-year growth rate in four quarters. It was led by higher household consumption, especially of contact-intensive services, and buoyant investment activity, as compared to the same quarter of the last fiscal that bore the brunt of the second Covid-19 wave.

But this was lower than the Reserve Bank of India estimate that the GDP growth rate was likely to be around 16.2 per cent in the first quarter. Finance Secretary T V Somanathan said the Indian economy is “on course” to achieve over 7 per cent growth this fiscal.

“It (Q1 GDP) is good enough to achieve the rate of growth that we think everyone including the IMF and RBI have expected as real GDP growth for four quarters of this year. We are on course to achieve more than 7 per cent GDP growth in the year, in the range 7.0-7.5 per cent. The IMF has predicted 7.4 per cent,” he said at a briefing.

Data released by the National Statistical Office Wednesday showed that even though the revival of economic activity has pushed the gross domestic product (GDP) of Rs 36.85 lakh crore for the June-quarter past the pre-Covid levels, it is only 3.8 per cent higher than the economic output of the corresponding quarter in 2019-20 (pre-Covid).

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Also, while the year-on-year GDP growth for April-June is the fastest to be witnessed in the last one year, in absolute terms, on a sequential basis, the economy contracted by 9.6 per cent during the April-June quarter this fiscal as the GDP shrunk quarter-on-quarter from Rs 40.78 lakh crore in January-March of 2021-22. During the first quarter of the last fiscal, GDP growth was recorded at 20.1 per cent. Somanathan said the Q1 GDP growth tends to be lower than the Q4 GDP of the previous fiscal year due to higher government spending in the last quarter.

Going forward, looming headwinds are predicted, including the worsening global growth prospects, the impact of rising inflation on consumption, and the progressive hike in interest rates that could end up denting the growth momentum as the year progresses.

The two bright spots: private final consumption expenditure — a measure of consumption of goods and services by individuals — grew by 25.9 per cent year-on-year during April-June while gross fixed capital formation – a proxy for investment activity – grew by 20.15 per cent.


The government is focusing on higher capex even as revenue expenditure remains proportionately lower, Somanathan said.


Headwinds ahead

In the months ahead, headwinds are predicted including a slide in global growth prospects, impact of rising inflation on consumption and hike in interest rates, alongside the waning of the base effect. These could end up slowing the growth momentum.

“We will focus on capex and we will try to control revenue expenditure to the extent possible. We have some large revenue contingencies which are going to come in here in terms of fertiliser subsidies, which are in terms of food subsidies. So the fact that revenue expenditure has been growing slightly less than proportionately to that is not a bad thing. It’s a good thing. It shows that we are on course to achieve our fiscal deficit targets and it is not because of a slowdown in capital expenditure,” he said, adding that there is unlikely to be any adjustment to government borrowing going ahead.

He also said that the high interest rate scenario is unlikely to affect private capital expenditure as it is not sensitive to interest rates.


“If it were interest rate sensitive, it would grow very much when yields are low. It doesn’t happen like that and similarly it is not so sensitive that 75-100 basis points are enough to deter capital investment which was otherwise felt to be profitable,” he said.

Government capital expenditure has increased 62.5 per cent year-on-year to Rs 2.1 lakh crore during April-July this year.

Among the eight key sectors, trade, hotels and transport services recorded a GVA growth (gross value added, which is GDP minus net product taxes) of 25.7 per cent in April-June, while construction and utility services grew 16.8 per cent and 14.7 per cent, respectively. The manufacturing sector recorded GVA growth of 4.8 per cent in the June-quarter, while agriculture saw a growth of 4.5 per cent.

Even as the GVA of trade, hotels and transport services surged nearly 26 per cent, it was the only one among the eight key sectors to have lagged behind the pre-Covid levels – effectively proving to be the primary drag on the economic activity emerging from Covid effect. Compared to April-June of 2019-20, the trade, hotels and transport services sector was down 15.5 per cent in the first quarter of this fiscal. All the other sectors recorded a GVA growth.

Economists had estimated the GDP to grow between 13-16.2 per cent during the period.


Earlier this month, in its monetary policy meeting, the RBI said that the GDP growth rate is likely to be around 16.2 per cent in the first quarter of this fiscal year. CPI inflation during the quarter had stayed above 7 per cent (7.79 per cent in APril, 7.04 per cent in May and 7.01 per cent in June).

Experts said the GDP growth is likely to moderate as the base effect normalises going forward.


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“GDP growth will certainly moderate in Q2 FY2023, as the base effect normalises, as underscored by the moderation in the core sector growth in July 2022. Additionally, an uneven monsoon is likely to weigh upon agri GVA growth and rural demand. However, a robust demand for services, and some easing in the commodity price-inflicted pain for producers should support a YoY GDP growth of 6.5-7.0 per cent in the ongoing quarter, and 7.2 per cent for the year as a whole,” Aditi Nayar, Chief Economist, ICRA said.


Knight Frank India’s Director-Research Vivek Rathi said: “In the coming months, India’s economy would face headwinds primarily arising from widening trade deficit as a result of decelerating exports due to global demand slowdown. Additionally, the investments in the economy could get hindered due to tightening borrowing costs and elevated input costs.”

On the impact on growth from the slowdown in China, Somanathan said the effects for India will not be “significantly adverse” as India is a net importer and not net exporter. “So, unlike other countries, the Chinese slowdown is less likely to affect our exports because we are huge net importers. So for us, the issue is of less significance as for certain other economies in the region,” he said.

First published on: 01-09-2022 at 04:22:31 am
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