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NEW DELHI : After double digit expansion in the first quarter, India’s economic growth will likely slow to 6.5% in the second quarter largely due to the high base and erosion of corporate profitability due to inflation, according to economists.

However, a services sector recovery and government capital expenditure together supported growth in the pre-festive quarter ended September, they said.

The official gross domestic product (GDP) numbers for the second quarter will be released on 30 November by the ministry of statistics and programme implementation (MoSPI). Most projections are in line with the monetary policy committee’s forecast of 6.3% for the second quarter.

With forecasts ranging between 6% and 7%, economists believe private investment is yet to fully recover and further monetary policy tightening may pose a challenge for additional investment in manufacturing. High inflation in the meanwhile will keep corporate margins under pressure.

In fact, the second half of FY23 will likely see a sharp deceleration in growth on account of the global economic environment, which is expected to have a bearing on India’s exports and overall economy.

“We estimate GDP growth in Q2 FY2023 at 6.5-6.7%, benefitting from robust demand for contact-intensive services, pre-festive season stocking of goods and easing margin pressure in some sectors. The downsides are posed by the mixed output trends revealed by the advance estimates of kharif production, adverse input cost movements for sectors such as cement, as well as the impact of the flagging external demand on non-oil merchandise exports," said Aditi Nayar, chief economist, ICRA Ltd.

RBI governor Shaktikanta Das had cautioned during the last policy meet in September that headwinds from extended geopolitical tensions, tightening global financial conditions and possible decline in global demand can pose downside risks to growth.

Elevated international commodity prices, and the rupee’s slide to a historical low impacted margins for companies. After hovering at over 7% since April, retail inflation eased to a three month low of 6.7% in October, but was still over the RBI’s upper tolerance band of 6%. Wholesale inflation softened to single digits after 19 months.

“Inflation would have a significant impact on GDP in the second quarter, as several sectoral GDP (value added numbers) are based on corporate results, including in the manufacturing, hotels, real estate and computer-related sectors. While part of the increase in input costs was transmitted to the final price for certain industries, in general, input costs rose at a faster pace than selling price, thus depressing profits. This comes out in the fact that sales have grown smartly while profits have fallen," said Madan Sabnavis, chief economist, Bank of Baroda. He has estimated the Q2 GDP at 6.5%.

ABOUT THE AUTHOR

Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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