Policy-anticipated rate of slowdown

GDP growth slowed from 6.3% in Q2 2022-23 to 4.4% in Q3 on decelerating consumption and investment as the trade balance improved. Private consumption growth declined from 20% in the first quarter to 8.8% in the second and finally to 2.1% in the third as private investment growth trended down from 20.6% to 9.7% to 8.2%. The improving trade balance was accounted for by a slower deceleration of exports from 19.6% to 12.3% to 11.3% as imports grew 33.6%, 25.8% and 10.9% over the first three quarters of the fiscal year. Demand is facing headwinds at home and abroad, lowering prospects for growth in subsequent quarters, although the National Statistics Office (NSO) has, in its second advance estimates, retained the 7% projection for 2022-23. GDP growth during the fourth quarter will have to be 3.8% for the forecast to hold. This will have to be accomplished without any statistical pandemic tailwind.

Services will have to do some heavy lifting with manufacturing posting a second consecutive quarter of shrunken output. Manufacturing is emerging from its recent trough of a 3.7% decline in output during the July-September quarter. But it is still 1.1% below the level reached in October-December 2021. Services have grown 14.9%, 10.5% and 7.6% in the first three quarters of 2022-23, with most of the advantage of reopening of contact-intensive activities already factored in. Construction has moved out of monsoon-related disruptions and has resumed its strong showing. Agriculture is maintaining a consistent uptrend, reducing downside risks to growth in the absence of adverse weather events, although early readings of the El Nino pattern suggest there could be some concern over the southwest monsoon this year.

The economy is slowing at a policy-anticipated rate and is on course to deliver revenue buoyancy that could help restore consumption demand while ramping up public sector capital expenditure to stoke private investment. Policy may have to be sharpened to address domestic demand affected by persistent inflation.