Q3 Economic Growth Stronger Than Data Suggests: Economists

The apparent slowdown in India's GDP growth in the October-December quarter has been driven to a large extent by revisions to past data, economists said, adding that the growth is evolving on expected lines and may not sway the central bank to pause rate hikes.

India's GDP grew 4.4% in October-December, down from 6.3% in July-September, and below the 4.6% forecast in a Reuters poll.

The growth for 2021/22 was raised to 9.1% from 8.7% earlier as part of a regular schedule of revisions. Meanwhile, the contraction in GDP in 2020/21 was revised to 5.7% from an estimated drop of 6.6% previously.

These revisions led to a higher base on which growth for the October-December quarter was measured. Barring a revision, the GDP growth in the third quarter would have been 5.1%

The lower-than-expected growth was led by an upward adjustment in the base year GDP, Pranjul Bhandari, chief India economist at HSBC said, adding that the level of output compared to pre-pandemic quarters continued to improve.

The level of output at the end of December 2022 was 11.6% higher than the pre-pandemic 2019 quarter, said Bhandari. This is an improvement from September, when output was 9.4% above the comparable pre-pandemic quarter, she added.

Citibank's India economists said the sequential momentum in growth held up in the third quarter, implying the economy is moving along the path seen in pre-Covid quarters.

The sequential real GDP growth of 3.5% was higher than the 3.3% average growth for Q3 in pre-Covid years, Samiran Chakraborty, chief economist for India at Citi, wrote in a note.

It "reaffirms our view that growth momentum remains close to pre-Covid levels," Chakraborty said.

Services outpacing manufacturing activity, and investments leading consumption remain the dominant narrative, economists at QuantEco Research said.

Some segments, especially private consumption and manufacturing, did show weakness even after accounting for data revisions.

Private consumption in the third quarter rose only 2.1% from a year earlier, a steep fall from the 8.8% growth seen in the second quarter.

Without the revisions, growth in private consumption would have been 6%, said V. Anantha Nageswaran, India's chief economic advisor.

Private consumption growth between December 2019 and 2022 was at 14.8%, compared to a 15.2% growth between September 2019 and 2022, HSBC's Bhandari pointed out.

Among the key sectors, manufacturing shrank 1.1% in the third quarter, following a contraction of 3.6% in the previous three months. The sector would have grown by 3.8% in the third quarter without a revision in data, said Nageswaran.

Weakness in manufacturing activity, however, has been reflected in employment data, too. "GDP data reflects continued weakness in manufacturing activity and strong momentum in construction activity, in line with trends in employment data," Citi's Chakraborty said.

Most economists do not see the GDP data swaying the central bank away from another 25 basis point rate hike in April, even though at least two members of India's monetary policy committee (MPC) have argued that weakness in growth merits a pause.

The GDP growth number is broadly in line with the Reserve Bank of India's estimates, and is unlikely to shift the central bank's projections materially, said Rahul Bajoria, chief India economist at Barclays.

"Following a set of hawkish minutes and the inflation overshoot in January, we think that the balance of risks has tilted towards another hike. We expect a 25 basis point hike in April with continued dissent in the MPC."

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