What drove GDP growth in the July-Sept period?

Government expenditure has taken a backseat. Photo: Mint
Government expenditure has taken a backseat. Photo: Mint


  • A consensus estimate in a poll carried out by the news agency Reuters stood at 6.2%.

The gross domestic product (GDP) growth for the July to September quarter was 6.3%, meeting the Reserve Bank of India’s (RBI’s) forecast. A consensus estimate in a poll carried out by the news agency Reuters stood at 6.2%.

Of course, this is much lower than the 13.5% year-on-year growth seen between April and June. This is primarily because of the weakening base effect. GDP growth had slowed down dramatically through most of 2020 and 2021 because of covid. This ensured that the economic growth from April to June was in double digits.

So, what drove GDP growth in the July to September period? One of the ways of calculating GDP is adding private consumption expenditure, government consumption expenditure, investment, and net exports (exports minus imports).

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Of these four constituents, private consumption expenditure typically tends to form 55-60% of GDP. It grew by 9.7% during July to September, after having grown by close to 26% from April to June. A close to 10% growth of private consumption, or the money you and I spend on buying things, is what primarily drove the GDP growth. Investment, which forms a much smaller part of the GDP than consumption, also had a role to play. It grew by 10.4%.

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In all this, government expenditure has taken a backseat. From April to June, government expenditure had expanded by 1.3%. It contracted by 4.4% during July to September. The government had increased its expenditure big-time through most of 2020-21 and 2021-22 and it is natural that it is now trying to go slow as the economy recovers. The fiscal deficit of the government has expanded in the last two years and so has the public debt. Both need to be controlled in the years to come.

How does the situation look if we compare this to how things were before covid? GDP growth between July to September 2019 and July to September 2022 was 2.5% per year. Private consumption has grown by 3.6% per year, over the last three years. Clearly, it will take time for the economy to make up for the growth it lost out on because of the spread of the pandemic.

Finally, economic growth is expected to slow down during the second half of FY23. The Reserve Bank of India’s GDP growth forecast for the quarter ending December and the quarter ending March is 4.6% each. There are multiple reasons for this.

First, the base effect will weaken as the economy grows out of the negative economic impact of the pandemic.

Second, much of the rich Western world is expected to experience an economic slowdown if not an outright recession. This is expected to negatively impact exports. Exports grew by 11.5% from July to September, but the exports of non-petroleum goods were down by 17.6% in October and have grown by just 2.8% from April to October. This isn’t good news for the economy.

Third, the US Federal Reserve is expected to keep increasing interest rates to rein in decadal high inflation. Given that the Fed sets global monetary policy, if it keeps raising rates, as it has said it will, the RBI will have no choice but to follow, at least to some extent.

This might have some impact on investment as well as consumption. The impact can already be seen on the financials of corporates. Centre for Monitoring Indian Economy data from the financial results of more than 3,300 listed non-financial sector companies shows that their interest expenses between July and September had increased by close to 31%, after having gone up by close to 19% from April to June. This disincentivizes corporates from investing and expanding further. All in all, economic growth will have to bear the cost of high inflation in the months to come.

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