Q2 GDP Growth: A sequential recovery, but headwinds ahead

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GDP growth in Q2 FY23 stood at 6.3% y-o-y (in line with our forecast)  compared to 13.5% in 1. To recall, the first quarter numbers had been bumped up as the low base from the pandemic years had continued to distort the y-o-y figures. From the supply side, GVA (Gross Value Added) growth stood at 5.6% y-o-y (lower than our expectations) widening its gap with GDP growth (70bps) in the second quarter (possibly due to higher tax collections, GDP = GVA + Net Taxes). We are holding on to our FY23 annual GDP forecast of 6.8% and expect growth in Q3 & Q4 to be between 4-4.5%. For FY24, we expect GDP growth of 6.3%, with downside risks to our forecasts. There are risks stemming from the slowdown in global growth and impact of inflation and tighter financial conditions on the consumption recovery. On the policy front, this GDP print does not change our view on RBI’s rate action in December. Inflation remains above the RBI’s upper tolerance band and warrants a further increase in rates. We continue to expect a 35bps rate hike in the next policy and then a 25bps in the February policy, which would take the policy rate to 6.5% by fiscal year end. • First the good news. On a sequential basis (q-o-q), growth was in the green in the second quarter – a signal that the economy continued to recover despite global headwinds. GDP growth rose by 3.6% q-o-q in Q2 compared to a contraction of 9.6% in Q1. Secondly, all sectors moved above pre-pandemic output levels. To recall, services like trade, hotels, transport and communications hadn’t yet surpassed pre-covid levels in the last quarter. • The frontrunners: Agriculture sector recorded growth of 4.6% y-o-y despite the impact of uneven monsoons on kharif production. But the bigger contributor to growth was the services segment that recorded the highest sequential growth in the last three quarters (rose by 8.7% q-o-q in Q2) – clearly reflecting the impact of the re-opening effect. • But we see signs of stress – ongoing and more to come – in this GDP release. The first disappointment was the sharp contraction in manufacturing GDP which fell by 4.3% y o-y in Q2. Pressure on corporate profitability due to elevated costs and lower exports are likely to have weighed on manufacturing production. Going forward while input costs moderation might support corporate profitability, the slowdown in domestic consumption as well as exports are likely to be headwinds for manufacturing growth. • What about the demand side of the equation? The biggest contributors to GDP growth in Q2 were investment and private consumption and the component “discrepancies”. The latter is usually a residual showing the difference between the production and expenditure approach to calculating GDP (For details on this see RBI’s paper, “Statistical TREASURY RESEARCH 30 Nov 2022 econresearch@hdfcbank.com Classification – Public Classification – Public Discrepancies in GDP Data: Evidence from India”, 2018). Bottomline is that a high discrepancy value does increase the likelihood of revision in the Q2 (overall and internals) numbers in the subsequent releases. • In terms of drags, government consumption expenditure dropped by -4.4% y-o-y in Q2. While revenue expenditure in H1 FY23 as a % of BE remains in line with the trend last year, the second quarter had a significant base effect from last year pulling down the y o-y growth figures. To recall, the government was slow to spend in Q1 FY22 due to the second wave and had significantly increased its spending in Q2 FY22.


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