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Industry slows sharply

Q3FY22 real GDP slowed sharply to 5.4% (vs. 8.5% in Q2FY22), missing estimates by 100bp. Key highlights are: i) Industry and capex were weak (0-2% YoY) despite strong exports reflecting weak domestic demand. ii) Unlocking aided services momentum. iii) India’s manufacturing GDP is now outpacing listed companies. iv) Nominal recovery remains strong, aiding tax collections and corporate profits. We are marking down FY22 real GDP forecast by 60bp to 8.9% owing to a large miss in Q3FY22 and weak start to Q4FY22, although, we retain FY23 forecast at 7%. While the situation is evolving, as things stand today, the crude oil spike and Fed tightening are posing significant risks to global growth momentum in 2022.

Q3FY22 GDP: Slows sharply, missing estimates

Q3FY22, real GDP/GVA expanded 5.4%/4.7% YoY, missing our estimates by nearly 100bps. This is nearly 300-400bps lower than that in Q2FY22. While rising base is certainly at play, the two year CAGR growth is quite weak at 3% (20-year low excovid), given that it was the most unlocked quarter of the pandemic. However, higher prices led to strong nominal GDP growth of 16% (vs. 19% in Q2FY22). In fact, on a trend basis (4QMA), nominal GDP is 16% higher than the pre-covid level, while real GDP is just 1% above leading to divergence between strong nominal variables (GST collections, corporate profits) and weak real indicators.

Underlying trend: Slowdown in industry, services improves

The key highlights are: i) Unlocking aided services growth led by public administration and other services (education, etc.) ii) Exports remain the strongest growth engine (>20% YoY on real basis) iii) Despite this, manufacturing GVA remains weak (0% YoY), reflecting weak domestic demand. iv) Construction has slipped into contraction and has thus pulled down capex growth as well. v) India’s nominal manufacturing GVA outpaced that of listed companies, reflecting peaking of market share gains. Overall, the underlying domestic growth momentum has softened with exports and unlocking of services being key growth drivers

FY22 GDP forecast marked down to 8.9%; FY23 retained at 7%

The large miss in Q3FY22 GDP numbers, along with a weaker start to Q4FY22 has forced our hand to lower FY22 GDP forecast by 60bp to 8.9%. If our forecasts are met, then it implies FY19-22 real GDP CAGR growth of 1.8% with agriculture growth outpacing industry and services. Further, risks to outlook have only risen. First, rise in oil prices along with Fed tightening is likely to weigh on global reflation and thus India’s exports - lynchpin of recovery so far. Second, India too is facing a negative terms of trade shock, which could further weigh on the already weak domestic demand. Third, if Fed tightening and elevated crude stays, India’s BoP situation could deteriorate, making policymaking challenging (see link). What is comforting though, is that balance sheets of the banking system and India Inc are in far better shape than has been the case in the past.

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