The FY23 growth story decoded in five charts

Data on the central government’s finances, also released last week, showed satisfactory numbers, with the Centre meeting its targets for fiscal deficit, capital expenditure and tax collections for 2022-23. (HT_PRINT)
Data on the central government’s finances, also released last week, showed satisfactory numbers, with the Centre meeting its targets for fiscal deficit, capital expenditure and tax collections for 2022-23. (HT_PRINT)

Summary

  • The Indian economy sprung a surprise last week by recording higher-than-expected growth in the March-ended quarter as well as in the full year 2022-23. We explore the underlying figures.

The Indian economy sprang a surprise last week by recording higher-than-expected growth in the March-ended quarter as well as in the full fiscal year 2022-23. The full-year growth was 7.2%, 20 basis points higher than analysts’ consensus estimates and the March-quarter print was 6.1%, almost a percentage point higher than most estimates. Data on the central government’s finances, also released last week, showed satisfactory numbers, with the Centre meeting its targets for fiscal deficit, capital expenditure and tax collections for 2022-23. Mint decodes what lies beyond the headline numbers.

Barely Recovered

The Indian economy grew strongly for the second straight year after covid-related disruptions. The growth got a gigantic push from the construction sector and the “trade, hotels, transport, communication and broadcasting services" grouping, both of which grew in double digits. However, the year-on-year growth, while heartening, concealed the overall impact of the pandemic and the recovery thereafter. Despite a surge in 2022-23, the average annual growth rate since 2018-19, was a mere 2.5% for the trade and hotels segment. GDP has risen by just 3.4% per year on average in these four years, and gross value added (GVA) by 3.8%. Growth in manufacturing has been dismal, and mining and quarrying actually shrank in size relative to 2018-19. While India has shown resilience by recording a 7%-plus GDP growth, the pandemic losses continue to weigh on the size of the economy. The four-year average growth rate since 2018-19 helps adjust for the lockdown skews.

Trade Boost

In a year that was defined by worries over slowing global growth and trade, India’s GDP witnessed its foreign trade component bucking the trend in the March-ended quarter. It was the first time in four quarters that net exports (exports minus imports) had a positive impact on economic growth, adding 1.5 percentage points to headline GDP growth. Merchandise exports slowed down significantly in FY23, keeping the goods trade deficit on an upward trend despite a slowdown in imports. However, the services trade surplus was enough to result in an overall positive impact on economic growth. But like goods exports, services exports could also face a slowdown in the wake of global crises from technology companies to banks, and this is a cause for worry. Contracting imports may tilt the needle in favour of GDP, but it is not ideal for a growing economy, as it points to lack of demand, which, in turn, could lead to further slowdown.

Demand Woes

Private final consumption expenditure (PFCE) number, a key proxy for consumption patterns, paints a worrying picture, as it grew a meagre 2.8% in Q4FY23. It was higher than 2.2% in Q3, but pales against the gross fixed capital formation (GFCF), a proxy for investments. With 8% and 8.9% growth in Q3 and Q4, respectively, GFCF contributed to India’s growth, highlighting the government’s efforts to push capital expenditure. The abysmal growth in consumption expenditure raises questions on whether the investment growth will sustain despite the apparent lack of demand. “Weaker private consumption still appears to be a worry, although it does not reconcile with the robust value-added growth of consumption-led sectors like trade, hotels, transport and communication services," said Madhavi Arora, lead economist, Emkay Global.

Tax Trends

The previous year ended on a satisfactory note for the central government, with its finances broadly in line with its revised estimates. However, while the tax collections were also in line with expectations, the tax-to-GDP ratio took a dip during the year.

Gross tax collections grew 10.4% in 2022-23, but this was significantly lower than the nominal GDP growth of 16.1%, resulting in gross tax-to-GDP ratio falling marginally to 11.3% from 11.5% the previous year. This was mainly on account of lower excise duty collections following the cuts on fuel last year. Going ahead, economists expect a slowdown in tax collections along with the anticipated slowdown in nominal growth. For the current year, the government has set a target of a 10.5% increase in tax collections—in line with its nominal GDP projection—which would mean the ratio could remain stuck at the same level, or may even decline further.

Forecast Revisions

The government's February estimate had pegged the GDP growth for 2022-23 at 7%. The better-than-expected figure has now encouraged economists to come up with more optimistic estimates for the ongoing fiscal year 2023-24 over the last week. State Bank of India raised its projection to 6.7%, up from 6.2% and the highest among all analysts. Kotak Institutional Equities also raised its estimate by 20 basis points. However, some analysts have refrained from upgrading their estimates citing possible downside risks. “Inflation is expected to moderate in FY24, which is a positive for household budgets and consumption, but the rise in home loan EMIs and its impact on the budgets of urban households, contraction in exports and their impact on employment, and the impact of a potential El Nino on crops, food prices and farm incomes remains to be seen," said Aditi Nayar, chief economist at Icra Ltd.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App