Interpreting Q1 2022-23 GDP Results

Introduction

Recently, the Central Government released the GDP estimates for the quarter ended 30 June 2022 i.e., first quarter of financial year 2022-23 (Q1FY23). The GDP growth was in double digits (though below the expectations of experts). There were many who were quick to point out that compared to the pre-COVID quarter (Q1FY20), our Compound Annual Growth Rate (CAGR) has only been 1.3% (S1). This article will try and deep dive into the same and look at some of the strong and weak points of our economy.

Comparison with Peer Economies

As per an interview with KV Subramanian, Former CEA and IMF ED Elect, India has grown faster during the COVID period compared to the other large economies like USA, Canada, Italy, UK, France, Germany, Japan, Italy etc. (S2). On the other hand, we have grown slower than economies like Vietnam, China etc. This implies that while our growth rates have been low, it is not bad compared to our peer economies. 

Sectoral Analysis

Our sectoral analysis is based on the concept of Gross-Value Added (GVA) in each sector. GVA mainly represents value of output less value of intermediate consumption (like raw material costs etc.).

Our Government classifies various sectors in the following manner:

  1. Agriculture, forestry and fishing ("Agriculture") - This includes GVA from Crops, Livestock, Forestry and logging and Fishing & aquaculture.
  2. Mining & quarrying ("Mining")  
  3. Manufacturing ("Manufacturing") - This includes GVA from sub-sectors like Food Products, Beverages and Tobacco, Textiles, Apparel and Leather Products, Metal Products, Machinery and Equipment and Other Manufactured Goods.
  4. Electricity, gas, water supply & other utility services ("Electricity")
  5. Construction ("Construction")
  6. Trade, Hotels, Transport, Communication and Services Related to Broadcasting ("Trade, Repair etc.") - This includes GVA from sub-sectors like Trade & repair services, Hotels & restaurants, Transport (Road, Rail, Air, Water etc.), Storage, Communication & Services related to broadcasting
  7. Financial, Real Estate & Professional Services ("BFSI, RE etc.") - This includes GVA from sub-sectors like Financial services, Real estate, ownership of dwelling & professional services (like IT Services etc.).
  8. Public Administration, Defence and Other Services ("Others")

Now, we shall see below how each of these 8 sectors have performed in Q1FY23, Q2, Q3& Q4FY22 vis-à-vis each of these quarters in FY20. FY22 quarterly has been used for all other quarters other than Q1 considering we do not have data for FY23 for these quarters. This is compared with the long-term growth in the pre-COVID period for each of these sectors for a particular quarter (from FY12 to FY20). With this comparison, we can calculate the loss in GVA for each of these sectors. 

Basis this analysis, I also mention whether the losses incurred in each of these sectors because of COVID can be fully reversed going forward. Of course, this reversal of losses is subject to many factors like global growth, exports, Government policies etc. However, the basic premise in giving such an opinion is the fact that if a particular sector has grown faster for at least one quarter (See Agriculture sector in Q3 in the chart below) in the Post-COVID period compared to the Pre-COVID period, it means the effect of COVID for that sector has not been such as to cause a permanent damage to that sector.      

  • Agriculture
    • As can be seen from the Chart below, the loss for this sector is 1.5% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 1% which is very minimal. This is because Agriculture was among the least affected sectors. 
    • Considering that in Q3, the Post-COVID growth rates have been higher and also considering the overall loss is immaterial, it seems that the losses can be offset going forward.     

      







  • Mining
    • As can be seen from the Chart below, the total loss for this sector is 4% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 2%.
    • Considering that in Q2, the Post-COVID growth rates have been higher, it seems that the losses can be offset going forward.   








  • Manufacturing
    • As can be seen from the Chart below, the total loss for this sector is 12% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 4%.
    • Considering that in Q4, the Post-COVID growth rates have been higher, it seems that the losses can be offset going forward. 
  • Electricity
    • As can be seen from the Chart below, the total loss for this sector is 11% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 7%.
    • Considering that in all four quarters, there has been some loss in GVA, it appears that the loss in this sector is irreversible and might remain as it is going forward. 
                    
  • Construction
    • As can be seen from the Chart below, the total loss for this sector is 12% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 2%.
    • Considering that in Q4, the Post-COVID growth rates have been higher, it seems that the losses can be offset going forward. Further, specific to Construction sector, Government focus on capital expenditure, PM Gati Shakti etc. point to the fact that the losses in this sector can be reversed going forward.  

  • Trade, Repairs etc.
    • As can be seen from the Chart below, the total loss for this sector is 44% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 27%.
    • Considering that in all four quarters, there has been substantial loss in GVA, it appears that the loss in this sector is irreversible and would remain as it is going forward. Further, it appears that the loss in this sector is substantial unlike what we observed in other sectors.  

  • BFSI, RE etc.
    • As can be seen from the Chart below, the total loss for this sector is 18% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 10%.
    • Considering that in all four quarters, there has been some loss in GVA, it appears that the loss in this sector is irreversible. However, the loss in Q3 and Q4 is less material and gives one hope that there can be a full recovery for this sector going forward.
  • Others
    • As can be seen from the Chart below, the total loss for the this sector is 3% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 4%.
    • This sector primarily includes Government spending (Central, State and Local) including on sub-sectors like Health, Education etc. There was a significant increase in Government spending in the Post-COVID period compared to Pre-COVID period. This implies that the other sub-sectors have performed relatively poorly (which would primarily include Personal services like Washing, Hair Dressing etc.). 
    • Accordingly, the losses in this sub-sector at least appears irreversible and the losses for this sub-sector would be quite substantial and comparable to Trade, Repair etc. 
  • Overall GVA (excl. Trade, Repair etc.)
    • As can be seen from the Chart below, the total loss is 10% compared to the Pre-COVID period for Q1. For all 4 quarters combined, the average loss is around 5%.
    • In the chart, below I have excluded the Trade, Repair etc. (which contributed almost 20% of GVA in pre-COVID period) sector since the losses in that sector was substantial and most of the GVA for contact services (which were affected most significantly by COVID falls in this bucket).   
    • On an overall basis, it appears that there were no losses during H2 (Q3 losses have been effectively compensated by Q4 gains). This gives one hope that even for H1 the losses will be compensated going forward. 
    • Since the GVA for some of the sectors in Q1FY23 were not up to the mark so as to compensate for the losses in pre-COVID period, the compensation may happen in Q1FY24 or later.   

Summary and Conclusion

At an overall level, it appears that losses have been substantial and permanent in Trade, Repairs etc., Electricity and Personal Services sectors. While there have been losses in all sectors in Q1FY23 compared to Pre-COVID period growth rates, it seems that these losses have the potential to be compensated going forward based on H2 data.

I am not going into the finer details of GDP computation using Expenditure method (using Consumption+ Investment+ Government Consumption+ Net Exports). However, at an overall level, it seems that for Q1, Private Consumption (CAGR of 3.2%), Government Consumption (CAGR of 3.1%) and Capital Formation (GFCF) (CAGR of 2.2%) have all grown faster than the GDP (CAGR of 1.3%) (compared to Pre-COVID level), but still lower than Pre-COVID trends. Further, exports (CAGR of 6.3%) and imports (CAGR of 9.2%) have not only grown faster than the GDP but also faster than Pre-COVID era trends.

In the shorter-term, the key challenges seems to be:

  • Russia-Ukraine War and its impact on Global stability and commodity prices
  • Recession in advanced economies and China which can create a dent on our exports growth. Signs of slowing Merchandise exports growth for July and August 2022 seem to indicate that (S4). Though Service sector growth appeared to show robust growth in July 2022 (at 20%), it was still lower than the April to June 2022 which showed average Service Sector growth of 27% (S5). This indicates that even Service sector exports may slow down in the coming months.
  • In the domestic front, some negative signs include:
    • Two-wheeler sales still at 27% lower than Pre-COVID levels from April to July 2022 (S6). This may be because of high fuel prices since customers at that level are sensitive to price of fuel. But, it may also be indicative of stress among the lower income group.
    • MGNREGA demand remaining above Pre-COVID levels even until August 2022 indicating rural distress. However, it has to be said that in July and August 2022, it came very close to Pre-COVID levels albeit slightly higher (S7).
    • Kharif sowing lower than previous year which indicates that Agricultural growth may not be as robust during this Crop season (S8).
    • Negative volume growth in FMCG sector. The growth in FMCG sector in past few quarters has mainly been account of inflation (S9).
    • Increasing current account deficit from 1.2% in FY22 and expected to touch 3% in FY23 (S10). This will have an impact on our Forex reserves, depreciating effect on Rupee which in turn will lead to higher import costs and higher inflation (given most of our inflation currently is imported).             

To end on a positive note, some good things to look forward to would be:

  • GFCF was at 35% of GDP for Q1FY23 which is the highest levels observed in Q1 for the past decade. India's main problem post 2011-12 has been the slowing capital investments. This was one of the reasons that led to the pre-COVID slowdown of the Indian economy during late 2018 and 2019 (along with slowing global growth, ILFS collapse etc.). Considering the following, it would appear that capital this trend may reverse during the coming months: 
    • Government's focus on capex spending
    • PLI Schemes which have focuses more on Capital intensive sectors (though it must be said that labor intensive sectors like Textiles are not excluded)
    • Deleveraged balance sheets of Private Companies coupled with profit levels not witnessed in over a decade (S11)
    • Capacity utilization crossed 75% in Q4FY22 (it had not crossed 75% since Q4FY19, i.e. 3 years back) (S12). Typically, Companies tend to invest if capacity utilization levels cross 75%. If this trend can be sustained for a few quarters and considering the factors above, there will be significant capex spending by the Private sector as well.
  • Well capitalized banking sector with adequate provisioning and low NPAs (S13). Further, Credit growth increased from 8.3% in January 2022 to 15.1% in July 2022 (S14). A sector that was dragging the economy during the pre-COVID period is turning into a source of strength. This can help growth in Capital Investments by Private Sector as well as drive consumption. 
  • Easing of Oil and prices of other commodities (which was witnessed in July 2022 and August 2022) will have a dampening effect on inflation which feel from 7.8% in April 2022 to 6.7% in July 2022 (S15). This can positively impact Two-Wheeler, FMCG sales, easing current account deficit etc.
  • Fiscal deficit upto July 2022 was only 20.5% of the budgeted deficit from April to July 2022 (compared to 21.5% in April to July 2021). Further, tax collections have been robust (if we exclude duty cuts in Excise, Customs etc.). This shows that Central Government would have some head-room to increase spending in the coming months which can help drive growth. (S16)   

Sources

S1: https://www.newslaundry.com/2022/09/01/fantastic-number-tv-anchors-miss-the-nuance-in-135-gdp-growth 

S2: https://economictimes.indiatimes.com/markets/expert-view/dont-focus-on-the-glass-half-empty-india-has-the-highest-growth-rate-among-top-economies-over-3-years-kv-subramanian/articleshow/93942292.cms?from=mdr

S3: https://mospi.gov.in/web/mospi/download-tables-data/-/reports/view/templateOne/16701?q=TBDCAT

S4: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1856546#:~:text=by%20PIB%20Delhi-,India%20has%20achieved%20merchandise%20export%20of%20USD%2033.0%20billion%20in,28.73%20billion%20in%20August%202021

S5: https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR801DD6533E14BD24F8281BDE951069BDC12.PDF

S6: https://fada.in/images/press-release/162eb3e4a3291dFADA%20Releases%20July'22%20Vehicle%20Retail%20Data.pdf

S7: https://mnregaweb4.nic.in/netnrega/MISreport4.aspx

S8: https://www.business-standard.com/article/economy-policy/paddy-sowing-over-in-97-of-normal-area-acreage-6-less-than-last-year-122090201107_1.html

S9: https://www.financialexpress.com/industry/fmcg-sector-to-return-to-double-digit-growth-this-year-nielsen/2615333/

S10: https://www.business-standard.com/article/economy-policy/india-s-current-account-deficit-likely-to-touch-105-bn-this-fiscal-report-122071201379_1.html#:~:text=The%20country's%20current%20account%20deficit,deficit%2C%20according%20to%20a%20report.

S11: https://www.business-standard.com/article/markets/corporate-profit-to-gdp-ratio-attains-11-year-high-of-4-3-in-fy22-122062200979_1.html#:~:text=%C2%ABBack-,Corporate%20profit%2Dto%2DGDP%20ratio%20attains%2011%2Dyear,high%20of%204.3%25%20in%20FY22

S12: https://www.rbi.org.in/Scripts/QuarterlyPublications.aspx?head=Quarterly%20Order%20Books,%20Inventories%20and%20Capacity%20Utilisation%20Survey

S13: https://www.business-standard.com/article/economy-policy/banking-sector-s-gross-npa-falls-below-6-lowest-in-six-years-122061601135_1.html#:~:text=Gross%20non%2Dperforming%20assets%20(NPAs,far%2C%20M%20Rajeshwar%20Rao%2C%20deputy

S14: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54289

S15: https://mospi.gov.in/documents/213904/416359//CPI%20Press%20Release%20July%2020221660305608707.pdf/cabaeca1-387f-d0e5-de72-f879f8b29773

S16: https://cga.nic.in/

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