GDP numbers show growing risk of uneven economic recovery

The GDP growth print for India, released on February 28, strongly reflects growing risks of an uneven economic recovery.

While a lower real GDP growth at 4.4 per cent (y-o-y) in Q3, FY23 could be attributed to the statistical base effect, and the upward revisions of the past data prints, a disaggregated data presents a starkly uneven picture.

From the output side, the real support to growth has come from the agriculture and allied activities (up 3.7 per cent, y-o-y), construction activities (up 8.4 per cent) and the contact-intensive services such as trade, hotels, transport, etc. (up 9.7 per cent). However, the manufacturing sector — a major job creator, has again shrunk by 1.1 per cent (y-o-y) in Q3, FY23 over and above the shrinkage of 3.6 per cent in the previous quarter. In terms of absolute values also, the manufacturing gross value added has consistently declined since Q4, FY22. This is indeed worrisome.

One obvious reason behind this is the continued weakness in the investment sentiment of the private sector. While the overall gross fixed capital formation (in real terms) has grown by 8.3 per cent (y-o-y), thanks to the Union government’s capex support, the share of investment in GDP has further declined to 31.8 per cent in Q3, FY23 from 34.2 per cent in the previous quarter. This is the lowest in the past four quarters.

The weakness in aggregate consumption demand that we have been highlighting for long is obviously seen in a tepid growth of 2.1 per cent (y-o-y) in private final consumption spending during Q3, FY23. In terms of absolute values, total private consumption spending is just marginally higher than its pre-pandemic level. Moreover, as the government is in a strict fiscal consolidation mode, the government’s final consumption spending has shrunk by 0.8 per cent (y-o-y) in Q3, FY23 over and above the contraction of 4.1 per cent in the previous quarter.

So far as private consumption spending is concerned, the other high frequency indicators have been pointing out uneven consumption recovery. In our observation, consumption demand remains strong only for the affluent classes. This is reflected in higher sales volumes of more expensive cars, higher sales of cars than two-wheelers, healthy demand for premium and luxury homes, and higher imports of consumer goods, etc.

A weak consumption demand among non-affluent classes is reflected in the contraction of consumer non-durables production by 1.2 per cent (y-o-y) during April-December, FY23. Even rural consumption demand continues to stay subdued for the past many quarters. The third quarter results rolling in from most FMCG companies show they are facing declining demand in their rural markets. According to retail intelligence firm Bizom, the FMCG sales in the rural markets showed a decline of 0.2 per cent, as compared to the positive growth in urban sales at 4.4 per cent, in December 2022, as against the preceding month.

There is some downside risk to the consumption spending by affluent classes too. This part of consumption may partially get affected because of a cutback in fresh hiring and lower pay increments given by domestic IT companies, whose salary bill continues to grow much faster than that of the rest of Indian industry.

While a weak investment sentiment and an uneven consumption recovery pose major macro risks to India’s growth outlook, global uncertainties, including weakness in the major economies, tighter financial conditions, and ongoing geopolitical tensions, too have clouded the economic prospects.

It needs to be seen for how long the agriculture and contact-intensive services will continue to do the ‘heavy lifting’ for India in 2023, after having contributed nearly 71 per cent to the total quarterly GVA (in real terms) during Q3, FY23.

(Rupa Rege Nitsure is Group Chief Economist, L&T Financial Services)

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