India’s economy grew by 6.3% in the second quarter of FY23 following a double-digit growth of 13.5% in the first quarter of this fiscal. The slowdown in growth compared with the first quarter was on account of the normalisation of the base and a contraction in the manufacturing sector’s output. However, both sequential improvement and good growth over the pre-pandemic level (Q2 FY20) signal the economy’s resilience despite global growth and financial uncertainties. The GDP growth in Q2 was only marginally higher than our expectation (6.2%) mainly because of higher-than-expected growth in trade, hotels, transport and communication-related sectors.

On a sequential basis, domestic economic output expanded by 3.6% reversing the contraction seen in the previous quarter with services gaining momentum. When compared with the pre-pandemic period, GDP has recorded a growth of 7.6% with a broad-based recovery across sectors. Increasing discretionary spending and higher mobility have boded well for the services sector. The industrial sector’s performance was led down by the manufacturing sector which contracted by 4.3% (y-o-y).

Both private consumption and investment rate edged up in Q2 FY23 compared with the corresponding quarter of previous year supported by higher economic activity. However, the global growth slowdown has weighed on the net exports.Sectoral Contribution

  • Agriculture sector grew at a pace of 6% in Q2 FY23 compared with a growth of 3.2% in the corresponding quarter a year ago. As per the first advance estimate (AE) of foodgrain production of kharif output (released in September) for 2022-23, total foodgrain output is estimated to be lower by 4% primarily due to lower rice production. This could have implications on the agriculture sector’s output growth in the coming quarters.
  • Industrial output contracted by 8% in Q2 FY23 on y-o-y basis compared with a growth of 7% a year ago. This was mainly because of the poor performance by the manufacturing sector which has been marred by high input costs. We can expect the sector to fare well in coming quarters due to festive push and easing of commodity prices.

GDP Q2 FY23: Services Powers Growth, Manufacturing Falters

  • Services sector, having the highest share in GDP, recorded a growth of 9.3% in Q2 FY23 owing to the revival of contact-intensive sectors. The output in the sectors related to trade, hotels, transport, communication and broadcasting witnessed a double-digit growth of 14.7% benefitting from the pent-up demand. However, compared to the pre-pandemic period, these sectors were only marginally

Sectoral Growth (% y-o-y)

Q2 FY22Q3 FY22Q4 FY22Q1 FY23Q2 FY23
Agriculture, Forestry & Fishing3.22.54.14.54.6
Industry7.00.31.38.6-0.8
Mining & Quarrying14.59.26.76.5-2.8
Manufacturing5.60.3-0.24.8-4.3
Electricity, Gas, Water Supply & Other Utility Services8.53.74.514.75.6
Construction8.1-2.82.016.86.6
Services10.28.15.517.69.3
Trade, Hotels, Transport, Communication & Broadcasting9.66.35.325.714.7
Financial, Real Estate & Professional Services6.14.24.39.27.2
Public Administration, Defence and Other Services19.416.77.726.36.5
GVA (at basic price)8.34.73.912.75.6

Source: MOSPI

Consumption and Investments

  • The share of private consumption in GDP increased to 58.4% in Q2 FY23 from 6% in Q2 FY22. Most of the gain in consumption has come from the urban demand with indicators such as GST collections, retail credit, PV sales and petroleum consumption posting double-digit growth in Q2 FY23. Rural demand struggled to catch pace as two-three wheeler and tractor sales grew at a relatively muted pace whereas, production of consumer non-durables (measured by IIP) contracted by 6.5% in Q2. While private consumption has recorded a growth of 9.7% (y-o-y) in Q2, government consumption contacted on both an annual and sequential basis.
  • The investment to GDP ratio increased to 34.6% Q2 FY23 from 33.4% in Q2 FY22 owing to strong capital expenditure push by the government. Investment GDP has also recorded a strong jump of around 20% when compared to the pre-COVID period (Q2 FY20).
  • A sharp weakening of net exports in Q2 compared with a year ago level has also weighed on overall GDP With fears of a global growth slowdown and weaker currency, the decline in net exports will remain a cause of concern.

Growth in Consumption and Investment (% y-o-y)

Q2 FY22Q3 FY22Q4 FY22Q1 FY23Q2 FY23
Government Final Consumption Growth8.93.04.81.3-4.4
Private Final Consumption Growth10.57.41.825.99.7
Gross Fixed Capital Formation14.62.15.120.110.4
GDP (at constant prices)8.45.44.113.56.3

Source: MOSPI

Way Forward:

Going forward, the most critical aspect would be a further pick-up in the domestic demand scenario as the external environment would remain challenging. The pick-up in the private capex cycle would be contingent on continued improvement in the domestic demand scenario. The fall in global commodity prices should provide comfort to the manufacturing sector in the coming quarters. Services sector will continue to gain from rising discretionary demand and the festive season push. We expect GDP to grow at 6.9% for the full fiscal year.