FY23 GDP grows at an impressive 7.2% as Q4 GDP bounces back

1 Jun 2023 , 09:38 AM

The GDP numbers for the fourth quarter and for the fiscal year FY23 as a whole were impressive. The MOSPI put out the fourth quarter real GDP growth for March 2023 quarter at 6.1% and for the full fiscal FY23 at 7.2%. The fourth quarter bounce in GDP was the key as the GDP growth had dipped to 4.5% in Q3 after global recession fears mounted. What was the big driver in Q4 and what was the overall driver for GDP growth in FY23? 

Agriculture was robust in FY23 and manufacturing growth disappointed. However, the big boost came from the two service sectors viz. construction and contact intensive sectors (trade, hotels, transport). That was the big story; a story of revival in the services sector, which more than made up for the lax growth in manufacturing. Incidentally, that is also evident in the sharp growth in services exports from India in FY23.

How the GVA panned out for FY23?

The gross value added (GVA) has emerged as the key measure in recent times for getting a picture of macro growth. Here again, the GDP is the starting point. However, from the GDP, the impact of indirect taxes and subsidies are eliminated to get GVA. Shorn of subsidies and indirect taxes, it shows value addition, without the impact of government action. The table below captures the GVA trend for the last 3 financial years viz. FY23, FY22 and FY21. The relative growth of FY23 and FY22 have also been compared.

Industry	2020-21 (2nd RE)	2021-22  (1st RE)	2022-23 (PE)	Percentage Change Over Previous Year
2021-22	2022-23
1. Agriculture, Forestry & Fishing	20,76,327	21,49,122	22,34,269	3.5%	4.0%
2. Mining & Quarrying	2,89,905	3,10,415	3,24,708	7.1%	4.6%
3. Manufacturing	23,25,438	25,82,473	26,17,059	11.1%	1.3%
4. Electricity, Gas, Water Supply	2,87,757	3,16,110	3,44,418	9.9%	9.0%
5. Construction	9,83,619	11,29,368	12,42,354	14.8%	10.0%
6. Trade, Hotels, Transport, Communication	21,59,495	24,56,447	28,00,112	13.8%	14.0%
7. Financial, Real Estate & Services	29,58,852	30,98,827	33,20,305	4.7%	7.1%
8. Public Administration, Defence & Others	16,00,090	17,55,263	18,81,615	9.7%	7.2%
GVA at Basic Prices	1,26,81,482	1,37,98,025	1,47,64,840	8.8%	7.0%

Data Source: MOSPI (absolute figures in ₹ crore)

So, what are the key takeaways from the GVA data for the last 3 financial years. The GVA growth in FY23 at 7.0% is impressive as it comes on a FY22 growth base of 8.8%. In absolute terms, the GVA at Rs147.65 trillion for FY23 is higher than the GVA of Rs137.98 trillion in FY22 and the GVA of Rs126.82 trillion in FY21. The GVA for the Q4FY23 bounced to 6.5%, sharply higher compared to 4.7% in Q3 and at 3.9% in the year ago fourth quarter.

What is of real interest is the actual break of this 7.0% growth in gross value added (GVA). Agricultural GVA growth has been robust at 4.0% in FY23 compared to 3.5% in FY24. Despite weak Kharif output, the overall food grain production continued at record levels as the Rabi crop made it up. The disappointment came from manufacturing which fell to just 1.3% growth in FY23 compared to 11.3% in FY22. The slowdown concerns took a toll on exports, even as higher interest rates put pressure on corporate performance. Fortunately, both factors turned around in the fourth quarter. But the big story was the sharply higher double-digit growth in construction and contact intensive sectors like trade, hotels, and transport. They have given a boost to the services sector, which is making up for the weakness in manufacturing.

How much did inflation impact GVA growth in FY23?

Let us just spend a moment on this idea. Growth can be measured in nominal terms (the absolute accretion in GDP) or in real terms (after adjusting for inflation). Normally, when we talk about growth in GDP or GVA, it is always on real growth basis. However, one can understand the role of inflation by looking at the nominal growth. The table below captures the break-up of GVA growth in FY23, based on nominal GVA.

Industry	2020-21 (2nd RE)	2021-22  (1st RE)	2022-23 (PE)	Percentage Change Over Previous Year
2021-22	2022-23
1. Agriculture, Forestry & Fishing	36,95,412	40,66,649	45,57,599	10.0%	12.1%
2. Mining & Quarrying	3,16,268	4,29,364	5,83,535	35.8%	35.9%
3. Manufacturing	28,00,895	33,96,735	36,36,171	21.3%	7.0%
4. Electricity, Gas, Water Supply	5,00,804	5,55,605	7,41,540	10.9%	33.5%
5. Construction	13,43,531	17,37,505	20,27,545	29.3%	16.7%
6. Trade, Hotels, Transport, Communication	28,70,667	36,11,993	44,48,156	25.8%	23.1%
7. Financial, Real Estate & Services	40,36,766	46,12,286	53,00,147	14.3%	14.9%
8. Public Administration, Defence & Others	26,24,437	30,28,745	34,48,178	15.4%	13.8%
GVA at Basic Prices	1,81,88,780	2,14,38,883	2,47,42,871	17.9%	15.4%

Data Source: MOSPI (absolute figures in ₹ crore)

What are the key takeaways from the table above. Till the third quarter of FY23, inflation was playing a major role in depressing the real growth. That was why the central banks in the US, EU and even in India stayed obsessed with inflation control. However, the impact of inflation has reduced from the fourth quarter and for the full fiscal year FY23. Here is a sampler. On a nominal basis, GVA growth in FY23 is 15.4% compared to 17.9% in FY22. However, in real terms, the GVA growth in FY23 is at 7.0% against 8.8% in FY22. It shows that, while inflation remains a challenge, its impact on real growth is waning.

How has inflation impacted the various components of nominal and real GVA growth in FY23 over FY22? Interestingly, the impact of inflation on agricultural growth and on manufacturing growth has been limited. Where inflation is still playing a big role is in services. Like in the US, India appears to be having a problem with services inflation, and in this case, the robust growth in services is being offset by high levels of services inflation.

How the GDP break-up by expenditure component look in FY23

For looking at the key drivers of GDP, we compare some of the key triggers across the last four quarters of FY23, as captured in the table below.

Expenditure Component	FY23 (Q1)	FY23 (Q2)	FY23 (Q3)	FY23 (Q4)	Q1 %	Q2 %	Q3 %	Q4 %
1. Private Final Consumption Expenditure (PFCE)	21,82,357	22,98,123	24,78,700	23,99,515	58.3	59.3	61.6	55.0
2. Government Final Consumption Expenditure (GFCE)	4,11,243	3,32,450	3,48,329	4,85,284	11.0	8.6	8.7	11.1
3. Gross Fixed Capital Formation (GFCF)	12,97,588	13,25,580	12,73,453	15,38,071	34.7	34.2	31.7	35.3
4. Changes in Stocks (CIS)	31,050	30,591	29,868	35,954	0.8	0.8	0.7	0.8
5. Valuables	34,959	1,08,206	45,595	37,330	0.9	2.8	1.1	0.9
6. Exports	9,15,111	9,27,872	9,17,492	9,94,047	24.4	23.9	22.8	22.8
7. Imports	10,01,571	10,74,495	10,14,998	10,00,311	26.7	27.7	25.2	22.9
8. Discrepancies	-1,26,452	-70,326	-55,812	-1,28,375	-3.4	-1.8	-1.4	-2.9
GDP (₹ in crore)	37,44,285	38,78,000	40,22,625	43,61,515	100.0	100.0	100.0	100.0
GDP   (Percentage change yoy)	13.1 %	6.2%	4.5%	6.1%	N.A.	N.A.	N.A.	N.A.

Data Source: MOSPI (absolute figures in ₹ crore)

Here we move away from GVA to look at GDP growth over the last 4 quarters. The 7.2% GDP growth for FY23 is broken up as 13.1% in Q1, 6.2% in Q2, 4.5% in Q3 and 6.1% in Q4. There has been a recovery in GDP in the fourth quarter, which is largely in sync with the high frequency data points. But a few shifts are evident in the fourth quarter GDP data. Trade is playing less of a role in impacting the GDP this year. While the role of private final consumption has fallen sharply in Q4, the share of gross fixed capital formation has surge sharply, showing private sector investments betting on a capital cycle recovery.

Will GDP numbers impact the RBI rate outlook?

Will the latest GDP numbers make the RBI more hawkish or dovish? Some of the growth concerns evidenced in the third quarter have been addressed in the fourth quarter. That is the good news. Also, the RBI efforts to aggressively curb inflation appears to have paid off. With the RBI deciding to pause in April and most likely in June too, it does look like the RBI rate hike cycle is over after the 250 bps rate hike between May 2022 and February 2023. Going ahead, RBI is likely to maintain a neutral stance on rates, unless there are major concerns on the inflation and growth front. It is a bet on stability.