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Key headlines

India’s Jan-Mar23 GDP growth posted a sharp upside surprise, amongst the strongest this quarter in Asia and displaying resilience in the face of a less than favourable handover from negative terms of trade shock as well as a difficult global geopolitical backdrop last year.

Real GDP growth in 1Q23 (4QFY23) rose 6.1% yoy, higher than our and market consensus of around 4.8-5.0%. This compares to a revised 4.5% in 4Q22. Supply-side gauge, i.e., Gross Value Added (GVA) output rose by a faster clip of 6.5% vs 4.7% in 4Q22.

Annual growth in FY23 averaged 7.2% yoy after 9.1% in FY22. High deflators and a strong growth outturn lifted the nominal GDP growth to 16.1% yoy last year, providing a cushion to deficit/ debt ratios.

We examine the growth numbers more closely to gauge hits and misses amongst the drivers

• Indexed to pre pandemic i.e., 4Q19, private consumption lost momentum to rise 11% by Mar23 vs the baseline. The trend was similar for imports, whilst fixed asset investment, government consumption and exports extended the pace of recovery.

• Under expenditure/ demand, growth was led by three key drivers, i.e., fixed asset investments, net exports, and government consumption, whilst the heavy-weight private consumption rose at a more moderate pace. Fixed investments rose 8.9% yoy from 8% in the quarter prior, largely reflecting the strong central government’s capex push. Government consumption expanded after two quarters of decline. One of the most notable contributors to headline growth was net exports, as imports (goods & services) grew at half the pace of exports in the quarter, with the latter benefiting from better net terms of trade, rising manufactured goods shipments, and stronger service sector receipts. Net exports’ contribution rose to 1.4 percentage points (pp), accounting for over a fifth of headline growth after three quarters of drag. On the other hand, private consumption, which accounts for 60% of GDP, rose 2.8% yoy, only marginally better than 2.2% in 4Q22, likely impacted by high inflation, elevated fuel prices (not responding to lower global prices) and softer urban spending whilst rural demand showed signs of a lift in high-frequency indicators.

• On the supply/ sectoral end, the lift was more broad-based, with the most notable contribution to headline GVA by manufacturing and construction (see chart). Manufacturing output posed an upside surprise, up 4.5% yoy after two quarters of decline, likely reflective of the buoyancy amongst corporates who benefited from receding energy and input costs, besides firmer profits. The labour-intensive construction industry rose by double-digits. Heavy-weight services rose 6.9% vs 6.1% in 4Q, benefiting from a continued pick-up in contact-intensive services, higher government spending, and strong financial sector performance. Agri and allied sectors rose a sharp 5.5% yoy from 4.7% in 4Q22, suggesting the hurt to rabi output from inclement weather has not been fully captured (likely in 2Q23), whilst allied activities fared better. Core GVA, e., a gauge of non-farm private sector activity, which excludes farm and government participation, rose 7.3% yoy from 5.3% in 4Q.

• The marginal gap between GVA growth (6.5%) and real GDP (6.1%) captures the difference between taxes paid and subsidies on products, with the latter likely to have eased at the start of the year.

• Nominal GDP moderated to 10.4% yoy in 1Q23 from 11.4% quarter before, reflecting decelerating deflators, in turn, mirroring the pullback in WPI inflation.

• Over the past three years, the share of private consumption has moderated by 0.7% to 60.6% of nominal GDP, whilst fixed capital investments rose to 29.2% (vs 27.2% in FY21). Trade now accounts for a larger part of the economy, with share of exports at 22.8% in FY23 (vs 18.7% in FY21) and imports (26.4% vs 19.1%).

Outlook and implications for monetary policy

Most lead indicators for 2Q23 (1QFY24) are still holding up, including GST collections, PMIs (higher services than manufacturing), industry credit growth, steel & cement output, and narrower trade shortfall, amongst others. At the same time, there have been few pockets of softness (freight, tractor sales etc.). Our consolidated gauge for rural and urban demand signaled an improvement in both indices at the start of the year, with the momentum softening for urban while rural holds up.

Besides the high base for FY24, we are mindful of two-way forces for the economy in the year ahead – tailwinds by way of receding inflation/ energy costs, sustained capex push by the government, better faring services, and relatively resilient US growth, whilst uncertainties linger owing to the lagged impact of tighter financial conditions, narrower liquidity surfeit, subdued global growth trend. These push and pull forces prod us to adjust our FY24 GDP growth projection to 6%, still a strong beat compared to regional peers but more conservative than RBI’s projection at 6.5%.

For policy, a strong GDP outturn will provide the central bank with the headroom to extend its pause in June. While the monetary policy committee might vote unanimously to keep rates unchanged, the decision to extend the stance could see a split as the doves would prefer to close the door on further tightening as inflation beats a retreat. Over the coming months, we expect the MPC to remain on wait-and-watch mode to gauge the fallout of weather conditions on the price trend before considering a pivot to easing.

Additionally, supportive recovery prospects lower the urgency for a quick turn in the policy direction. On liquidity, we do not anticipate any significant change from the present course of action, which is to tap temporary repo operations to provide support rather than durable tools, with some relief also expected from recent developments that are expected to add cash back into the banking system, i.e., withdrawal of high-value banknotes and surplus transfer by the RBI.



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