India’s economic growth slowed to 6.5 per cent during the July-September quarter because of a fading low-base effect. For the full year, we now expect the economy to grow at 7 per cent, with risks tilted to the downside. This implies that the second half of the year (October-March) will see growth slow down to 4.6 per cent, again largely due to the base effect and slowing global growth.
This was the second consecutive quarter with no functional disruption of economic activity by the Covid-19 pandemic. Since October, Google, too, has stopped reporting mobility indicators, which had become one of the most tracked data points for analysts and policymakers since the pandemic struck. This suggests that Covid-19 is unlikely to come in the way of growth for most parts of the world, with China, which is following a zero-Covid policy, being the key exception. That’s the good news.
The not-so-good news is that geopolitical tensions, high and broad-based inflation in many parts of the world and sharp increases in policy rates in developed countries amid a looming recession will continue to confront the global economy. In an interconnected world, these effects will spill over to India as well, despite its structural strengths.
Growing at 14.7 per cent, contact-intensive services such as trade, hotels and transport continued to be key drivers of the growth momentum in the second quarter. This segment had borne the brunt of the pandemic because of recurrent lockdowns, and is showing a strong rebound because of pent-up demand — a trend that is likely to continue this year. Interestingly, the sector is just 2 per cent above the pre-pandemic level and has been the slowest to catch up.
Private consumption was quite strong in the second quarter, growing by 9.7 per cent, and now 11.2 per cent above the pre-pandemic level. The resilience of domestic demand will shape the contours of GDP growth in coming quarters as the global growth momentum is anticipated to lose steam. Advanced economies, whose growth is expected to slow sharply next year, account for almost 45 per cent of India’s merchandise exports.
Manufacturing GDP growth slowed rather sharply due to the base effect and margin pressure on manufacturing companies. This is somewhat contradictory to the relatively strong signals from the Purchasing Managers’ Index (PMI) which, at 55.9, was in the expansion zone during the July-September quarter, while also being slower than the IIP growth of 1.4 per cent in the same quarter.
Currently, manufacturing is finding some support from government spending on infrastructure, particularly in sectors such as steel and cement. The festive season-related production and the continued strong demand in the automobile sector (especially in high-value segments), was not enough to prevent an overall slide in manufacturing. Manufacturing is likely to face headwinds in the second half of this fiscal, as the gloomier global environment has started hitting export growth. Merchandise exports shrank 16.7 per cent in October. But easing margin pressure due to falling input prices will provide some cushion to manufacturing GDP in the second half of this fiscal.
Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter. Although rains were 6 per cent above normal this year, they were quite lopsided and led to a drop in rice acreage in some of the rice-growing regions on account of rainfall deficiency and some damage to crops from excess unseasonal rains in October. In fact, October rains were 47 per cent above the long-period average. Rain shortfall in some regions, excess in others, and unseasonal excess rains point towards some hit to kharif production.
That said, the prospects for the winter crop (rabi crop), which is largely irrigated, look good owing to favourable soil moisture conditions and healthy reservoir levels. While rabi sowing was initially delayed on account of unseasonal October rains, it is now progressing well, with sown area until November 18 about 7 per cent higher than during the same period last year. This trend, if sustained, should offset the hit to kharif production to some extent. Overall, we expect agriculture to grow at 3 per cent this year, lower than the decadal average of 3.8 per cent.
Abnormal weather has also triggered food inflation, particularly in cereals, which will cool off only when the prospects for rabi crop become clear. While fall in inflation in October was largely due to a high base effect, core inflation continues to be sticky and food inflation risks persist. We foresee consumer inflation averaging 6.8 per cent this year. The RBI is likely to hike rates by 25 basis points in its December policy meet, after which we expect it to opt for a wait-and-watch approach to assess the impact of its previous rate hikes as well as the actions of other central banks such as the US Fed.
So far, healthy tax revenue collections have allowed the government to finance its bloated subsidy bill and investments without much pressure on the fiscal deficit. Led by government capex, investments grew 10.4 per cent in the second quarter.
On the other hand, strong corporate balance sheets not only cushion them against global headwinds but also provide an opportunity to kick-start the investment cycle once uncertainty subsides. In this milieu, the production-linked incentive scheme has incentivised private investment and fast-forwarded manufacturing investments in electronics and pharmaceuticals.
With the budget approaching, all eyes are now on the outlook for the next year. We have lowered our growth expectations for 2023-24 to 6 per cent from 6.5 per cent for two reasons.
One, India’s growth cycle has become well-synchronised with those of advanced economies. So, a sharp slowdown in these countries will spill over to India. Two, the maximum impact of domestic interest rate hikes on growth will play out next fiscal given that monetary policy impacts growth with a lag.
The key policy challenge for India will be to manage a soft landing amid the possibility of a hard landing in advanced countries.
The writer is Chief Economist, CRISIL Ltd