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* The NSO has pegged the first estimate of FY23 GDP growth at 7.0% (> RBI estimate of 6.8%), implying that 2HFY23 will see growth sharply moderate to 4.5% after the stellar print of 9.7% in 1HFY23. Nominal GDP growth is expected to be a whopping 15.4% (FY22: 19.5%), denoting an estimated deflator of ~8.4% in FY23.

* The estimated 2HFY23 growth will likely be driven by industry (partly led by the base effect), while services will slow significantly, mainly due to lower public spending. In 2H, Private consumption is likely to contract, while government consumption will lead growth.

* The advance estimates will have a short shelf-life – mostly based on extrapolation of indicators available until November. The exercise nonetheless is done to help the government to gauge the growth outlook and tax buoyancy for the budget. NSO will release the revised estimate of annual national accounts of the last 3 years by Jan-end which could change the base for FY23. Meanwhile, the second advance estimate for FY23/3QF23, due at end-Feb, should entail more factual data inputs. 

* Going ahead, despite recovery in domestic economic activity not yet broad-based, protracted global drags in the form of still-elevated prices, shrinking corporate profitability, demand-curbing monetary policies and diminishing global growth prospects weigh on output. This will put pressure on the 7% forecast for the FY23 domestic growth story, which still lacks the next lever of secular growth.

NSO pegs advance estimate for FY23 GDP at 7.0%

As per the NSO’s advance estimates, FY23 GDP is likely to grow at 7.0% as against 8.7% in FY22. This is slightly higher than the 6.8% GDP expectations of the RBI. This implies that estimated 2HFY23 GDP growth would significantly slow down to 4.5% from the highs of 9.7% in 1HFY23, partly also aided by the base effect. Shrinking corporate profitability, demand-curbing monetary policies and diminishing global growth prospects would also weigh on output, and would influence a lower print in coming quarters. Real GVA is expected to grow 6.7% in FY23, after the 8.1% in FY22. Nominal GDP is expected to gain a whopping 15.4% as against the highs of 19.5% in FY22 (budgeted 11.1% in Feb-2022). This implies an estimated deflator of ~8.4% in FY23 (10% in FY22). Our GDP expectation for FY23 (Consensus: 6.8%) was largely in line with NSO’s advance estimates, with the directional gains and growth drivers in line with that of NSO’s. However, we had expected services to do better than their estimation and industry growth to be a tad slower. We note the advance estimates are mostly based on extrapolation of indicators available until November and are thus susceptible to significant revisions.

The estimates depict H2 growth likely to be led by government spending

Supply-side estimates depict that agriculture should stay steady (3.5% vs 3.0% in FY22), while industry (4.1% vs 10.3% in FY22) will sharply slow down, and services (9.1 vs 8.4% in FY22) could pick up a bit. Within industry, mining (2.4% vs 11.5%) and manufacturing (1.6% vs 9.9%) are likely to see significant moderation, even though electricity (9.0% vs 7.5%) and construction (9.1% vs 11.5%) may see softer slowdowns. The slower growth in 2H is likely to be driven by sharp moderation in services (5.4% vs 13.1% in 1H) and agriculture, while manufacturing will pick up, partly led by the base effect. As per the expenditure side, government consumption is likely to increase by 3.1%, with strong growth in the government’s revenue expenditure so far. Private consumption is estimated to grow by 7.7% – a similar level to the 7.9% growth seen in FY22 – while GFCF growth will fall to 11.5% from 15.8%, amid the ongoing push for capex from the government. Exports (12.5% vs 24.3%) and imports (20.9% vs 35.5%) are both likely to fall sharply, due to the ongoing global growth slowdown.

Growth pressures likely to worsen ahead; 7% growth estimate has downside risk

CSO usually does the advance estimate of GDP one month ahead of the Union Budget, in order to help the government in evaluating the growth outlook and tax buoyancy for budgetary purposes. However, the revised estimate of annual national accounts of the last three years (due to release by end-January) would change the base for FY23 estimates, while the second advance estimate for FY23 and 3QF23 figures at end-February will probably entail more factual data inputs and could impart an upward bias to growth. Going ahead, traction in services amid stable urban consumption demand could continue at a slower pace for some more time. However, our channel checks depict mixed-to-weakening demand trends post the recent festive season, while the formal sector employment growth seems to be slackening, along with subdued real rural wage growth. Capex indicators are healthy, with further-improving capacity utilization; albeit, the momentum of the recovery is still below full strength, warranting policy support and push of government capex. This, in conjunction with higher global uncertainty, tightening global financial conditions, lower corporate profitability and a tighter policy reaction function of the RBI, will further curb domestic demand. The growth forecast of 7.0% for FY23 thus may have downside risk

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