In Focus: GDP Grows by 6.3% in Q2FY23; Agriculture Remains a Bright Spot

The real GDP grew by 6.3% YoY in Q2FY23 (6.2% our forecast) against 13.5% in previous quarter. Gross value added (GVA) grew by 5.6% in Q2FY23 from 12.7% in Q1FY23. 

From the demand side, private final consumption expenditure increased by an impressive 9.7% YoY showing traction in demand. Government final consumption expenditure remained a drag in Q2FY23 and contracted by 4.4% YoY. However, the government capex has been moving at a good pace as government completed about 54% of its budget target for FY23 between April-October 2022. Gross capital formation – a gauge of investment – increased by 10.4% YoY in Q2FY23. Exports increased by 11.5% YoY and imports increased by 25.4% YoY in Q2FY23 thereby squeezing the net exports. 

From the supply side, agriculture continues its momentum posing a growth of 4.6% YoY in Q2FY23. For rabi season also the outlook for agriculture remains bright. Wheat acreage under rabi sowing has already exceed 57% of total normal sown area by end of November 2022. Mining sector contracted by 2.8% YoY and manufacturing sector contracted by 4.3% YoY in Q2FY23 reflecting margin pressure due to higher commodity prices in Q2FY23. However, we expect the margin pressure to come down with ebbing global commodity prices.

Electricity, gas, and other utility services grew by 5.6% YoY in Q2FY23. Construction had a growth of 6.6% YoY. In the service sector; the contact intensive sectors such as trade, hotel, transport and communication increased by 14.7% YoY. Sequentially; trade, hotel, transport and communication registered a growth of 16% during Q2FY23. Financial and real estate services increased by 7.2% YoY. This is in line with the higher bank credit growth in recent months. Public administration and defence services increased by 6.5% YoY in Q2FY23. 

During H1FY23, the GDP grew by 9.7% against 13.6% in H1FY22. During H2FY23, the real GDP is expected to have some moderation. For the full year we see real GDP to be about 6.8-7%. We expect the Monetary Policy Committee (MPC) of RBI to raise the policy repo rate to 35bps in December given that inflation continues to remain above RBI’s upper tolerance band of 6%.