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India’s economy slowed in the September quarter as manufacturing output contracted amid rising interest rates and the favourable base effect from the pandemic period faded.

Gross domestic product grew 6.3% in the September quarter from a year ago, sharply slower than the 13.5% growth in the preceding three months. A Mint survey of 16 economists expected GDP to grow 6.4% in the September quarter.

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Rising costs of raw materials and higher interest rates hurt manufacturing growth. A persistently high inflation has forced the Reserve Bank to raise policy rates by 190 basis points this year to temper demand.

The finance ministry’s chief economic adviser, V. Anantha Nageswaran, however, pointed out several bright spots in the economic data, including capital formation as a share of GDP in the September quarter remaining more or less similar to the level seen in the June quarter, government’s capital expenditure showing strong growth despite lower government consumption and private consumption remains robust.

“The data confirms economic recovery continues and most components of economic growth are stabilizing at a moderate pace, and we are on track to deliver a 6.8-7% GDP growth for the current fiscal year, and we can look ahead as capacity utilization rate picks up, and as capital formation maintains its buoyancy and tax revenue growth indicates the vigour of economic activity, etc., we can look ahead to India building on its recovery further in 2023-24 as well," Nageswaran said at a briefing.

Data from the ministry of statistics and programme implementation showed government consumption in the September quarter declined by 4.2% from a year ago to 3.36 trillion. However, data shared by the finance ministry on Wednesday showed that in April-October, the Centre’s capital expenditure stood at 4.1 trillion from 2.5 trillion in the year-ago period.

Fixed investments or gross fixed capital formation (GFCF) has seen a 10.4% growth in the September quarter at 13.2 trillion, giving hope to policymakers that investments are picking up. Private consumption, too, grew 9.7% to 22.3 trillion in the September quarter, suggesting that this could further help in driving investments.

The farm sector showed robust growth despite a contraction in rice production, but experts cautioned that it might be an optimistic first advance estimate. Agriculture, forestry and fishing output showed 4.6% growth in the September quarter against 3.2% growth in the same time a year ago.

Ranen Banerjee, partner and leader of the economic advisory service at PwC India, said the 6.3% growth got support from the pickup in the contact services and travel industry. Festival sales in September have also helped, he said.

Data showed that the manufacturing sector’s output contracted 4.3% in the September quarter, while mining and quarrying output witnessed a 2.8% contraction. Exports, too, showed a growth. But subsequently, in October, merchandise exports plunged 16.5%, the first such decline in 19 months. Nageswaran said that by and large, in the short run, policy measures may not necessarily improve exports if global demand conditions remain weak on the back of uncertainties, including high global energy costs and tighter monetary conditions.

Experts remained confident of GDP growth in 6.8-7.2% range. “With the Q2 FY23 GDP growth only mildly below our forecast, we are retaining our estimate of real GDP growth for FY23 at 7.2%, although a deepening of external slowdown poses a risk," said Aditi Nayar, chief economist at rating agency ICRA Ltd. Nayar said the unexpected contraction in manufacturing output seems to reflect the impact of high input prices on margins in certain sectors.

Madan Sabnavis, chief economist at Bank of Baroda, said GDP growth is expected to be at 6.8% for the year, with a downward bias, depending on the changing economic environment. But the downside will not be more than 0.2-0.3%, Sabnavis said.

ABOUT THE AUTHOR

Gireesh Chandra Prasad

Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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