Home / Economy / Revival, low base fuel 13.5% Q1 GDP growth

BENGALURU/NEW DELHI : The Indian economy expanded 13.5% in the June quarter, the fastest in a year, led by a revival of consumption, recovery of the services sector, and the low base of last year, official data showed.

However, elevated global energy and commodity prices led by the supply chain disruption caused by the Russia-Ukraine war weighed on manufacturing activity during the quarter.

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Economists believe the rising interest rates led by monetary policy tightening and normalizing base may pose a challenge for additional investments in the manufacturing sector, and high inflation will keep corporate margins under pressure. This may hurt the economic growth outlook.

A Mint poll of 21 economists had estimated the GDP growth at 15.2%.

Finance ministry officials said they were confident India would record 7-7.5% economic growth this year. They said government capital expenditure worth 1.75 trillion was made in the fiscal first quarter, nearly a quarter of the amount earmarked for the full year and more than half of what was spent in the year-ago period.

June-quarter GDP figures are consistent with the assumption of a GDP growth in the range of 7-7.5% for FY23, finance secretary T.V. Somanathan said at a briefing. The government is on course to meet its capital expenditure target for the fiscal, he added. Also, it is unlikely that the government may need to borrow more than initially planned. “It is unlikely that any adjustment to the borrowing figure (for the second half of the fiscal) would be needed," said Somanathan.

Economic affairs secretary Ajay Seth said GST collections in August are estimated to grow by 27% annually to more than 1.42 trillion, crossing the 1.4 trillion mark for six successive months since March. This, he said, indicated robust economic activity. In addition, the volume of e-way bill generation in August registered a 15% growth to 75.6 million, indicating robust domestic economic activity.

However, GDP growth in the June quarter was slower than the Reserve Bank of India’s projection of 16.2%, the data released by the National Statistical Office (NSO) showed. This is over a 20.1% growth seen in the first quarter of the previous year, which was over a 24% contraction during FY21 when the national lockdown brought economic activity to a near halt.

The national GDP is only 4% higher than the first quarter of the pre-covid 2019-20 levels.

Nevertheless, India remained the fastest growing major economy in the world in the quarter.

“The GDP is largely a story of the service sector rebound. Going ahead, we see a secular downturn in the growth print, as the base effect fades and the economy slows sequentially. However, we maintain growth may remain at 7% for the year, albeit with the downside risk," said Madhavi Arora, lead economist at Emkay Global Financial Services. Global headwinds in the form of still-elevated prices, shrinking corporate profitability, demand-curbing monetary policies and diminishing global economic growth prospects weigh on the outlook, Arora added.

The difference between the real and nominal GDP widened significantly by over 13 percentage points due to a spike in inflation during the quarter. Nominal GDP stood at 26.7% in the first quarter of FY22. It is likely to support the fiscal deficit ratio during the year, which is budgeted at 6.4% of GDP for the current fiscal. Services sector recovery was led by trade, hotels, transport, communication and services related to the broadcasting segment, which posted a 34.3% growth during the quarter on the back of revival in contact-intensive services after the receding of covid-19 wave and withdrawal of the lockdowns in the states. However, it is still 15% lower than the first quarter of FY20. The financial services and real estate segment grew 9.2% during the quarter.

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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