Q3 GDP growth

 Q3 FY23 GDP growth estimates released on 28th Feb 2023 mentions 4.4% growth as against 5.4% GDP growth estimated during Q3 of FY 22.With estimate of about 4 to 4.5% growth in Q4, the full year FY 23 GDP growth will be around RBI's GDP growth estimate of 6.8%.The nominal GDP growth for the full year FY23 will be around 15.9%

Q2 FY 22 GDP growth is now estimated at 6.3%.

The most important datapoint in these estimates is the revision of GDP growth of Pandemic years.

The cumulative average real GDP growth during FY19-20 to FY 22-23 is now estimated better at 3.2% as against the potential real GDP growth of 7% of Indian economy.

Since the GDP estimates of the previous years have been revised upwards, the base effect has impacted the current year GDP growth estimates.

The most worrying aspect of Q3 of FY 23 is the contraction of manufacturing output at -1.1%.

Private consumption which contributes about 60% of Indian GDP has also languished at 2.1% in Q3 FY23.

Again Statistics reg. IIP and Consumption Spending Survey are not reliable and they are constantly under revision upwards now.MOSPI has an important task on hand for strengthening data collection for estimating IIP and Consumer Spending and making them robust.

With unabated inflation estimated at around 6% for the FY 23 ,which is the upper tolerance level of RBI, the monetary policy will have to continue with elevated borrowing costs. Such high borrowing costs dampen Private Consumption further feeding into a vicious cycle of lower GDP growth.

Government will have to be mindful of its high fiscal deficit which is also fuelling inflation to some extent.But Government is banking on Capex expenditure to crowd in Private Investment which will counter balance the inflation through higher production efficiencies.Govt should also look at fiscal incentives apart from PLI, to bring in Private Capex through Investment allowance and accelerated Depreciation schemes for the short term covering the next couple of years.

With dark clouds of high interest rates and liquidity tightening looming all over the globe ,GOI has extremely difficult task cut out for itself  inorder to maintain high GDP growth of 6%+ in FY 24.

Union Budget musings!

 Only unbridled Govt borrowings can crowd out Private investment.FS Somanathan clearly articulated in the post budget press conference that Nominal GDP growth will b 10.5% and incremental Govt Borrowings will grow only 8% or less & therefore, not a problem. As rightly said, Govt Capex will have multiplier effects and will crowd in Private investments.

Capex is 3.2% of GDP which  means about 55% of Fiscal Deficit of 5.9% will be used for Capex.That will have huge impact on job creation and other multiplier ripples across the Economy. Capital expenditure is estimated to be Rs 10,00,961 crore (37.4% increase over FY22-23).  The increase in capital expenditure is due to an increase in capital outlay on transport (including railways, roads and bridges, and inland water transport) by Rs 1,28,863 crore (36.1% increase)

Revenue deficit in 2023-24 is targeted at 2.9% of GDP, which is lower than the revised estimate of 4.1% in 2022-23(original BE for FY 22-23 was 3.8%).  Fiscal deficit in 2023-24 is targeted at 5.9% of GDP, lower than the revised estimate of 6.4% of GDP in 2022-23.  While the revised estimate as a percentage of GDP is the same as the budget estimate, in nominal terms, fiscal deficit would be higher by Rs 94,123 crore (increase of 5.7%) in 2022-23.  Interest expenditure at Rs 10,79,971 crore is estimated to be 41% of revenue receipts.The target for primary deficit (which is fiscal deficit excluding interest payments) in BE 2023-24 is 2.3% of GDP as against 3% in RE for FY 22-23(BE was 2.8%).

All the trajectories of deficits are on a downward trend since the end of pandemic and rightly so in tandem with Monetary tightening happening under Monetary Policy of RBI.But the downside is growth may get hampered may be after a long of 4to 6 months when Global headwinds are also expected to hit the demand in the Indian Economy.

Therefore front loading of Capex by GOI is the right strategy to keep up the demand momentum in the domestic economy. By the time Global slowdown or recession starts gnawing at our economy, RBI may have to tweek its Monetary Policy accordingly to shore up the sentiments.

In all probability, this situation has to be watched out for during second half of FY 23-24 as things stand and if El Nino plays out leading to deficient monsoon little earlier also.

Govt should keep an eye on Pvt Sector Capex growth minus the PLI scheme and also focus on MSME Investment growth. If possible, MSME and Pvt sector outside PLI scheme should be supported by increasing Depreciation rates for the next couple of years as an adhoc measure.

This will be mostly revenue neutral since any loss through higher depcn rates will be offset through tax revenue from higher economic activity.