GDP estimates indicate strong economic activity

The growth numbers need to be seen in the context of the roller coaster experience since the Covid-19-related lockdowns, and the subsequent recovery

The Second Advance Estimate (2AE) of FY23 Gross Domestic Product (GDP) retains the earlier growth forecast of 7 per cent year over year (yoy) in the First Advance Estimate (1AE). In addition, the growth estimate for FY22 was revised up sharply from the earlier 8.7 per cent to 9.1 per cent.

Two procedural points should be noted regarding the growth numbers.

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One, the National Statistical Office (NSO) revises the forecasts through a 6-step update, starting from the 1AE to (the final) Third Revised Estimate (3RE); this is done over three years, incorporating a progressively increasing set of new and updated data from multiple entities, both corporate, medium and small enterprises, and households, as well as surveys, all of which are released at multiple lags.

Two, the GDP is measured and reported from two perspectives. The first is from the output side (i.e., agriculture, industry, services) and the second from the demand side (i.e., consumption, investment, exports minus imports, etc.). These numbers are estimated using a variety of volume indicators, financial results of companies, surveys, bank sector data, etc.

A large part of the early estimates (as in the 1AE or the 2AE) are based on the financial quarterly results of large corporates listed at the stock exchanges. The 2AE estimates, for instance, use the declared results of the activity for the third quarter of FY23 of around 3,000 listed companies. The GDP comprises Gross Value Added (GVA, which is the true measure of economic activity) plus indirect taxes minus subsidies.

The 2AE growth in the GVA is 6.6 per cent (lower than the 7 per cent GDP growth estimate). The contribution to this headline growth (i.e., growth weighted by the share in GVA) of agriculture, industry, and services, respectively, were 0.5 per cent, 0.4 per cent, and 5.7 per cent. The most marked slowdown is estimated to be the manufacturing segment (with the contribution dropping to 0.1 per cent from FY22 (2 per cent). (Industry comprises mining, manufacturing, and electricity).

The largest share of the contribution of the services segment was from the ‘trade, hotels, transport and communication’ group, which probably reflects the effects of the post-Covid-19 opening up.

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On the demand side, the slowdown in FY23 GDP growth was broad based, with capital formation (i.e., investment) contributing 3.4 per cent and consumption 4.4 per cent. Both have slowed from FY22 levels. But the most remarkable change was a deterioration in India’s net foreign trade (i.e., exports minus imports) from +0.9 per cent in FY22 to (an estimated) -1.9 per cent in FY23. In other words, imports have grown much faster than exports.

Decomposing the annual growth forecast of FY23 in quarter wise terms, the growth impulse in FY23 has been weakening over the year, with growth falling from 13.2 per cent in Q1 to 6.3 per cent in Q2 to 4.4 per cent in Q3. However, for full FY23 growth to remain at 7 per cent, Q4 growth will need to be 5.1 per cent, which is well within the realm of possibility.

The falling trajectory, however, does not necessarily imply a slowdown. The growth numbers need to be seen in the context of the roller coaster experience since the Covid-19-related lockdown(s) beginning in March 2020, and the subsequent recovery. The ‘base effects’ of this volatility are beginning to wear off. In real terms, economic activity was higher than 12 per cent of pre-Covid-19 levels — i.e., FY20, up from 6 per cent in Q1 FY23.

All these data points pertain to ‘real’ (i.e., inflation adjusted) terms. GDP growth also needs to be measured in nominal terms (since after all, that is what we see in terms of our wages, salaries, consumption spends, savings, etc). GDP growth in nominal terms is estimated to have slowed from about 16 per cent in FY22 to 12 per cent in FY23. This reflects (in addition to the slowdown in activity) a drop in inflation. Wholesale price index inflation has moderated from 11.1 per cent to 6.4 per cent.

Anyway, FY23 is almost over. Both the Reserve Bank of India (RBI) and the Chief Economic Adviser of the government forecast FY24 GDP at around 6.4-6.5 per cent. However, there is too much uncertainty at this point, especially on the global front, and multiple scenarios might be needed to assess the likely outcomes.

Irrespective of the nuances of the methods for the forecast, growth continues to remain robust, and economic activity is resilient. This is remarkable, given the steep rise in loan interest rates due to the aggressive repo rate hikes by RBI.

(Saugata Bhattacharya is Executive Vice President and Chief Economist, Axis Bank)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH)