India’s Q3 FY23 (Oct-Dec) GDP came in at 4.4% y/y, slightly below our forecast of 4.5% y/y and consensus of 4.7% y/y. The slowdown comes on the back of sluggish manufacturing sector, which recorded a contraction for a second consecutive quarter. The subdued manufacturing sector activity persists despite the government’s push to encourage domestic output. Additionally, growth slowed on account of high inflation and waning demand.
India’s real GDP growth slowed to 4.4% y/y in Q4 2022 (Q3FY23), with the manufacturing sector contracted by 1.1% y/y during the quarter. The second consecutive quarter of manufacturing contraction was on account of subdued global climate and higher borrowing. Waning external sector stimulus appeared to have played a major part in this. Steadily rising cost of borrowing also limits expansion plans. The services sector also showed robust growth though. Trade, hotels transport and communication services recorded the highest growth of 9.7% y/y, as tourism recovered and contact-intensive services resumed. Communication was also supported by launch of 5G services in the country. Financial and professional services recorded a pick-up of 5.8% y/y during the quarter. Meanwhile, agriculture growth came in at 3.7% y/y, moderating from 4.6% y/y in Q2, as lower acreage and uneven rainfall dented output. Utilities output growth was at about 8.2% y/y, as energy demand surged.
Figure 1: India GDP Components (% change, y/y)
Source: National Statistics Office, Continuum Economics
On the expenditure side, growth was predominantly driven by the 11.3% y/y growth in fixed capital formation. Meanwhile, private consumption growth moderated to 2.1% y/y (down from 8.8% in Q2). The higher fixed capital formation growth is owing primarily to the government's persistent high capital expenditure pumped into the economy to ensure that economic growth sustains. Nonetheless, it appears from the numbers that the high capex has not been able to offset the moderation in private consumption and export stimulus completely. On a quarter-on-quarter basis the economy showed growth of 3.5%, slightly lower than 3.6% q/q recorded in Q2 FY23. The gross value added (GVA) growth too moderated to 4.6% y/y in QA3 Fy23, down from 5.5% y/y in Q2 FY23.
Looking ahead though, tighter liquidity conditions, increased cost of inputs, declining demand and cautious discretionary spending by the public will weigh on headline growth. The manufacturing sector is likely to face headwinds as the global economy slows. And while mining is expected to pick up again, driven particularly by coal, manufacturing may remain subdued as businesses remain wary of expanding or increasing capacity amid a looming global recession. With weather forecasts predicting the chance of El Nino and heat waves, crop damage concerns are also looming. Therefore, our expectation is that India's overall GDP growth will moderate from 7% in FY23 to 5.7% in FY24 (starting April 2023).
