India Q2 GDP Preview: Growth To Normalise As Base Effect Fades

The Indian economy continues to strengthen its recovery, even as growth normalises.

The gross domestic product is estimated to grow 6.2% in the April-June 2022 quarter, according to nine economists polled by Bloomberg. Gross value added is expected to rise 5.9%. GDP expanded 13.5% in the quarter ended June, and 8.3% a year earlier.

The Reserve Bank of India's nowcasting model pegs the second-quarter GDP growth at 6.1%.

Economic activity in Q2 benefitted from robust demand for contact-intensive services, healthy capital spending by the Government of India and pre-festive season stocking of goods, Aditi Nayar, chief economist at ICRA Ltd., said. The downsides arose from the mixed crop output trends revealed by the advance estimates of kharif production, adverse input cost movements for certain sectors with a higher fuel intensity, as well as the impact of the flagging external demand on non-oil merchandise exports. ICRA projects GDP to grow 6.5% year-on-year and GVA growth of 6.3%, respectively.

Growth in the GDP over the pre-Covid levels is expected to double to around 8% in Q2 FY23 relative to the 3.8% seen in the previous quarter, with a widening of the economic recovery, she said.

While GST collection growth has been robust at 27.5% year-on-year in Q2FY23, higher subsidy payouts, up 177.7% year-on-year, will likely pull down net tax revenue growth, minimising the wedge between GVA and GDP growth, stated a research note by Teresa John, economist at Nirmal Bang Institutional Equities. She pegs GDP growth for Q2 at 6.2%, while GVA is estimated to grow at 6.1%.

Agriculture is expected to grow 3% against 4.5% in Q1FY23, stated a research note by Jahnavi Prabhakar, economist at Bank of Baroda. This comes against the backdrop of above normal South-West monsoon, with marginally lower kharif sowing this year, she said.

However, untimely heavy rainfall in the states across northwest and central India between end-September and mid-October, is likely to have added to the moisture levels of the standing crop, which poses some downside risks to the kharif output relative to the first advance estimates, cautioned Nayar, who forecasts agri-GVA growth at 2.5%.

Growth in manufacturing volumes was modest, dragged down by the weak external demand, and subdued domestic demand for consumer durables amidst elevated input costs and fuel inflation, Nayar said. While the revenues of listed corporates were favourable in Q2 FY23, the tentative volume growth limited their ability to transmit the pain of higher costs into output prices, resulting in a compression of margins by a varied extent across sectors in that quarter, she said. ICRA projects manufacturing GVA growth to dip to about 3% in Q2 FY23 from 4.8% in Q1 FY23.

Electricity is expected to clock a growth of 5% in Q2FY23 compared with 14.7% in Q1FY23, according to Prabhakar's estimates.

The construction sector will continue to grow at a solid pace on the back of steady demand, Prabhakar said.

For services, on the other hand, revival in pent-up demand is expected to boost the hospitality sector, resulting in much higher growth in trade, hotel transport and communication sector, according to Prabhakar's estimates.

The high-frequency indicator for Q2FY23 has been impacted by back of base effect and hence needs to be read with caution when compared with previous quarters, Prabhakar cautioned.

For the industrial sector, while the sale of some durable and non–durable goods has been hit due to inflation in the past, the recent trend of cool-off in prices is likely to reverse the dip seen previously in the sector, Prabhar said, adding that earnings reports of FMCG companies, too, signal the same.

Buoyant GST collections and higher services PMI print is expected to boost growth, Prabhakar, who forecasts full-year expansion at 6.8% in FY23, said.