Key Takeout From Q2 GDP Numbers Is "So Far, So Good"; Q3 Will Be The One To Watch

The second quarter (July-September, or Q2) GDP estimates were in line with economists’ expectations, printing at 6.3 per cent against the first quarter’s 13.5 per cent.

Taken together with the first quarter’s numbers, the first half (April-September 2022) has reported gross domestic product (GDP) growth of healthy 9.7 per cent — a good enough base on which the economy can grow around 6.7-7 per cent, since the second half numbers are expected to be lower due to inflation and the global slowdown.

Gross value added (GVA), which is GDP plus product subsidies minus taxes, printed far lower at 5.6 per cent during Q2, which suggests that it is governmental fiscal action that is holding up GDP, despite healthy signs of a revival in investment activities.

Gross fixed capital investment remains steady at 34.6 per cent, higher than 2021-22’s 33.4 per cent.

What are the big takeouts of the latest set of GDP/GVA numbers?

The first big takeout relates not to these numbers, but that the next quarter is what is going to set the tone for how the year finally ends up.

This is because exports are flagging, and there is a question mark over how agriculture will fare, given the patchy rainfall this monsoon.

Unless rabi picks up dramatically, food inflation will remain elevated, though fuel inflation shows signs of weakening. The thing to watch is whether Q3 (October-December) will show any sharp downward inflection point or not.

The second takeout relates to inflation and government revenues. GDP growth in constant terms is shown to be 6.3 per cent, but in current terms it is a high 16.2 per cent. Even GVA shows a high 16.2 per cent. This implies that the GDP deflator is nearly in double-digits.

This deflator is bound to fall as the second half slows down economic activity and fuel prices moderate, but overall, higher inflation indicates that government revenues will remain strong.

Reason: higher prices mean higher revenues from product taxes, unless demand starts slowing further. The fiscal deficit target of 6.4 per cent for 2022-23 is thus well within reach.

The third takeout relates to sectoral performance. In Q2, there has been a worrying GVA drop in mining (-2.8 per cent) and manufacturing (-4.3 per cent).

If exports continue to underperform due to growing recession fears in Europe and north America, these sectors could drag growth.

On the other hand, with the abatement of Covid, the services sector is perking up, with trade, hotels and transport, et al, growing at 14.7 per cent, and finance, real estate, etc, at 7.2 per cent.

Construction grew at a healthy 6.6 per cent. The burden of growth depends on these sectors in the coming two quarters.

The fourth takeout is about high money GDP. In the first half this fiscal, the absolute GDP figure has clocked in at Rs 130 lakh crore.

The budget presented in February 2021 had assumed that GDP will grow to Rs 258 lakh crore, but the first half has already indicated that this number will be exceeded due to inflation.

This is one reason no alarm bells are ringing in North Block over the fiscal deficit target of 6.4 per cent, despite high subsidy bills on fertilisers and the Pradhan Mantri Garib Kalyan free food scheme introduced at the start of the Covid lockdowns in March 2020, which benefits 80 crore people.

The expectation is that the free food scheme will be ended, or substantially modified, after the Gujarat elections, both on account of its potential impact on the fisc in future, and the possibility of a lower kharif harvest this year, which will reduce stocks.

The two things to watch are what happens to the free food scheme after 31 December, and what kind of numbers Finance Minister Nirmala Sitharaman will have to play around with in the 2023-24 budget, which will be roughly the last full budget before the 2024 Lok Sabha polls.