The National Statistical Office (NSO) has pegged the GDP growth in Q2 FY2023 at 6.3 per cent, which is similar to our estimate of 6.5 per cent. As expected, a normalising base has sharply compressed the YoY growth from the double-digit 13.5 per cent expansion seen in Q1 FY2023. However, growth relative to the pre-covid period has improved appreciably to 7.6 per cent from 3.8 per cent, respectively, which provides a more meaningful gauge of the underlying growth momentum in this period.

GDP growth in Q2 FY2023 was boosted by a laudable YoY expansion of around 10% each in the performance of both private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF). One segment that exerted a drag was government final consumption expenditure (GFCE), which reported a 4 per cent contraction in Q2 FY2023. This was led by the modest de-growth in the Government of India’s non-interest revenue expenditure in this period, even though the state governments’ revenue expenditure had recorded a double-digit expansion.

The second culprit was net imports, which nearly doubled in Q2 FY2023 relative to the year-ago period, exerting a sizeable drag on the GDP growth. Interestingly, the size of net imports rose relatively modestly between Q1 and Q2 FY2023, which suggests that the expected rise in the current account deficit between these two quarters will not be alarming.

Simultaneously, the NSO placed the growth in the gross value added (GVA) in Q2 FY2023 at 5.6 per cent, which trailed our forecast (6.3 per cent) by a wide margin. The key downside surprise came from an unexpected contraction in manufacturing. While the IIP had already revealed that volume growth was anemic, a bigger issue seems to have been the adverse impact of high input prices on margins in certain sectors.

On the upside, the GVA growth in agriculture, forestry and fishing has been estimated at above 4.0% for the third consecutive quarter. This seems somewhat optimistic based on the decidedly mixed first advance estimates of the kharif crop, that were followed by reports of crop damage related to the unseasonal heavy rainfall towards the end of the monsoon season.

As anticipated, services stood out as the clear driver of growth in Q2 FY2023, accounting for a massive 5.3 per cent of the 5.6 per cent GVA growth in this period. Encouragingly, even the pandemic-scarred trade, hotels, transport, communication sub-segment surpassed its Q2 FY2020 performance in the just-concluded quarter, which augurs well for the growth outlook in the coming quarters.

So what lies ahead? The demand for contact-intensive services is likely to remain upbeat in the near term with the onset of wedding and holiday seasons. Moreover, a healthy demand for goods during the festive season is likely to have boosted manufacturing volumes, although the sustenance of the same remains to be seen. Additionally, the prospects of rabi output are favourable with an early pick-up in sowing, especially for wheat and mustard. Further, state governments have ample fiscal space to push

up their capex in H2 FY2023, although timely execution remains key. Capex announcements are likely to rise in Q3 FY2023 driven by state investor meets, even as execution is unlikely to be immediate.

The month-on-month momentum displayed by several high frequency indicators in October 2022 is healthy despite the early onset of the festive season. However, the latter has clearly dampened YoY growth prints on account of a larger number of holidays, as seen in the marginal 0.1 per cent rise in the core sector output in that month. Average trends for Oct-Nov would provide a better metric to assess the growth momentum in the ongoing quarter.

However, a gloomy global outlook poses the chief risk to Indian GDP growth, through its impact on merchandise and service sector exports. If the former translates to lower commodity prices, some of the aforesaid margin pressure may ease. On balance, we continue to expect the real GDP growth in FY2023 to exceed 7.0 per cent.

So what does the latest growth data imply for the Monetary Policy Committee’s (MPC’s) upcoming decision? GDP growth in Q2 FY2023 printed in line with the MPC’s projection of 6.3 per cent. We expect the CPI inflation to ease further from 6.8 per cent in October 2022 to 6.0-6.2 per cent in November 2022, but remain mildly higher than the 6% upper threshold of the medium term target range. Accordingly, we foresee a step down in the size of the next rate hike in December 2022 to 35 bps, from the 50 bps each seen in the last three policy reviews.

The writer is Chief Economist, ICRA Limited