InvestorQ : How were the GDP numbers for the first quarter? Why did markets react negatively to the GDP numbers on Thursday?
Dia Deshpande made post

How were the GDP numbers for the first quarter? Why did markets react negatively to the GDP numbers on Thursday?

swati Bakhda answered.
1 month ago

GDP for Q1FY23 was actually good in absolute terms at 13.5%. However, it was much below what the markets were expecting. For instance, 16.2% was the estimate by the RBI while the Reuters consensus estimate was closer to 15.5%. The lower than expected GDP growth in the June quarter can be attributed to central bank hawkishness, recession fears and supply chain bottlenecks. In its annual estimate for GDP for FY23, the RBI had been relatively conservative pegging growth at 7.2%, hence any further downgrade from here is unlikely.

Let us look at the factors that actually drove these GDP numbers. For that we need to look at nominal GDP, which is the GDP before inflation. The GDP that you normally see (13.5% in this case) is real GDP net of inflation. Nominal GDP growth is important since it shows the actual level of economic activity and job creation in the economy. In Q1FY23, nominal GDP was Rs64.95 trillion ($3.25 trillion annually) and had grown 26.7% yoy. That means nearly 13.2% of the nominal GDP was knocked out by inflation number.

What were the key positive triggers for nominal GDP growth? It was private consumption and capital investment. For instance, the private final consumption for Q1FY23 increased by 39.5% yoy from Rs28.47 trillion to Rs39.71 trillion. The share of private consumption in GDP surged by a full 560 basis points. There is good news on capital formation too. Gross Fixed Capital Formation (GFCF) is up 31.4% yoy in Q1FY23 from Rs14.44 trillion to Rs18.97 trillion. The share of Gross Fixed Capital formation in overall GDP basket picked up by 100 bps.

In the last 2 years since COVID, merchandise trade had been a great driver of GDP recovery. For Q1FY23, merchandise exports grew 29.7% yoy while its share in GDP increased by 50 bps compared to the corresponding period last year. The real issue is in merchandise imports. It grew by a whopping 56.0% yoy while its share in GDP increased by 520 bps. This spike in merchandise imports can be largely attributed to a spike in the import value of oil, coal and fertilizers. More than volumes, it is price factor that triggered the imports surge.

Another approach to GDP is via the gross value added (GVA), which is the GDP shorn of indirect taxes and subsidies. It is a better picture. GVA for Q1FY23 was up 12.7% yoy. What triggered this growth in GVA? There has been growth across agriculture, industry and services. The quarter saw an impressive 25.7% growth in contact intensive segments like trade, hotels and transport. The relative disappointment was manufacturing growing at just 4.8%. However, amidst these macro headwinds, GDP seems to have done a good job.