FY22 GDP estimates: Economic growth weighed down by mfg, construction

While an adverse base was expected to flatten growth in the quarter from 8.5% in Q2FY22, NSO's initial estimates are sorely below our expectation of a 6.2% YoY expansion in that quarter

India’s real GDP expanded by 5.4 per cent in year-on-year (YoY) terms in Q3 FY2022, as per the initial data published by the National Statistics Office (NSO). While an adverse base was expected to flatten growth in the quarter from 8.5 per cent in Q2 FY2022, the NSO’s initial estimates are sorely below our expectation of a 6.2 per cent YoY expansion in that quarter, with manufacturing and construction posting the largest disappointment. The absolute level of GDP was, however, a reasonably acceptable 6.2 per cent higher than the pre-Covid level of Q3 FY2022, signifying a recovery, albeit incomplete.

Gross fixed capital formation grew by just 2.0 per cent YoY in Q3 FY2022 and was only 1.4 per cent higher than the pre-Covid level of Q3 FY2020, highlighting the tentativeness of the investment cycle. Moreover, net imports enlarged to 6.2 per cent of GDP from 4.9 per cent in Q2 FY2022, thereby acting as a bigger drag on the GDP. The most encouraging piece of the disaggregated GDP data is the 7.0 per cent expansion in private final consumption expenditure in Q3 FY2022. This, coupled with the mild improvement in consumer confidence in January 2022 despite the onset of the third wave, bodes well for the outlook for demand, and by extension, capacity utilization, going ahead.

The NSO pegged the expansion in the gross value added (GVA) at basic prices at 4.7 per cent YoY in Q3 FY2022, trailing our expectation of 6.0 per cent. This follows from the marginal rise in manufacturing and a contraction in construction that is surprising despite the heavy rainfall in the southern states.

On a positive note, the services sector GVA surpassed the pre-Covid levels of Q3 FY2020, aided by considerably improved vaccination coverage. However, trade, hotels, transport, communication and services related to broadcasting continued to trail pre-Covid levels, albeit by a lower 4.6 per cent in Q3 FY2022 vis-à-vis the 11.1 per cent seen in Q2 FY2022.

In contrast to the lower-than-expected print for Q3 FY2022, the growth for Q1 and Q2 FY2022 has been mildly revised upwards by 19bps and 8bps, respectively. Overall, the second advance estimate for GDP growth for FY2022 is in line with our earlier expectation of 8.9 per cent, lower than the first advance estimate of 9.2 per cent.

Overall, GDP grew by 10.6 per cent YoY during April-December 2021, aided by a base effect-led rebound in gross fixed capital formation and private consumption.

Given the second advanced estimate for GDP, the NSO has implicitly projected an expansion of 4.8 per cent in Q4 FY2022. We believe that this looks rather optimistic now, given the fallout of the third wave on contact-intensive services, and the expected adverse impact of the spike in commodity prices fueled by geopolitical tensions on margins for this quarter, compounding an even larger base effect. As a result, we now expect the FY2022 GDP growth to print closer to 8.5 per cent.

In FY2023, we project the YoY expansion in real GDP and GVA at basic prices at 8.0-8.5 per cent, with growing downside risks stemming from a continued rise in oil and commodity prices owing to the fallout of the Russia-Ukraine conflict and a potential rise in market borrowing costs, both of which will compress margins.

How will the Monetary Policy Committee interpret these numbers and the outlook? Higher imported inflation vs. lower growth may still result in another status quo in April 2022.

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The author is Chief Economist, Icra Limited. Views are personal.