Weak global growth, compressed margins hit manufacturing, slowing down Q2 GDP numbers

India's GDP growth slowed to 6.3% in the second quarter due to weak industrial growth, especially in the manufacturing sector, which was impacted by weak global growth and compressed margins, data released by the National Statistical Office on Wednesday showed.

Economists predict that the lowest income earners will face greater difficulty making ends meet as a result of the government's inability to lower the cost of doing business, which has hampered manufacturing amid higher retail inflation. During this quarter compared to the same period last year, manufacturing and mining output shrank, driving Gross Value-Added growth to a slower-than-expected 5.6 per cent. This, along with high inflation and sluggish exports, slowed the overall GDP growth rate to 6.3 per cent.

For the three months ending in September, manufacturing production fell 4.3 per cent to Rs. 5.98 lakh crore. While an upward revision in manufacturing from the prior year contributed to the decline, there are still indicators that economic growth will encounter headwinds in the coming quarters.

Increased public investment and a return to a pre-pandemic routine have aided contact-intensive service sectors, offsetting some of manufacturing's woes. As a result, private consumer expenditure rose by 9.7 percentage points to Rs 22.29 trillion during this quarter and gross fixed capital formation increased by 10.4 percentage points to Rs 13.21 trillion.

According to various news reports, experts believe that the Reserve Bank of India (RBI) should slow down the rate at which it raises the policy interest rate going forward. Given the glaring red flags appearing in the manufacturing sector, there is widespread agreement that monetary tightening needs to be slowed down. For instance, the performance of the manufacturing sector as measured by the GDP and the performance as measured by the Purchasing Managers Index (PMI) for manufacturing show a significant gap. For the third month in a row, the manufacturing PMI has been higher than 50, indicating economic growth. However, the annual increase in gross value added dropped to 4.3 per cent by September.

The GDP growth in the second quarter of this fiscal year was predicted to be between 6.1 per cent and 6.3 per cent in an article published in the Reserve Bank of India (RBI) bulletin earlier this month. According to the Bank of Baroda's analysis, GDP growth in Q2 came in at 6.4 per cent, which is below their prediction of 6.5 per cent. Although overall trends were consistent with projections, the industrial sector's negative growth rate was a major disappointment.

Madan Sabnavis, chief economist of Bank of Baroda said, “While most metrics were in line with expectations, manufacturing's negative growth rate was a major letdown. According to the index of industrial production (IIP), manufacturing has been hit hard by slowing development among small and medium-sized businesses (SMBs) and declining earnings, which have reduced value added in the organised sector.”

As per data released, agriculture, forestry, and fishing contributed 4.6 per cent to GDP growth in Q2 FY 2022-23, while mining and quarrying contracted by 2.8 per cent. Growth in the provision of electricity, gas, water, and other utilities was 5.6 per cent in Q2 FY 2022-23, as growth in the provision of goods and services related to broadcasting was 14.7 per cent. In the provision of financial, real estate, and professional services the growth was 7.2 per cent.

Likewise, the country's capital expenditures, as measured by gross fixed capital formation (GFCF), increased to Rs. 13.2 lakh crore in Q2 FY 2022-23 from Rs. 11.9 lakh crore in Q2 FY 2021-22, a 10.4 per cent increase. Government final consumption expenditure (GFCE) declined by - 5.7 per cent to Rs. 3.3 lakh crore in Q2 FY 2022-23 from Rs. 3.5 lakh crore in Q2 FY 2021-22. Private final consumption expenditure (PFCE) also grew by 9.8 per cent to Rs 22.3 lakh crore in Q2 FY 2022-23 from Rs. 20.3 lakh crore in Q2 FY 2021-22.

Sharing its perspective on the data, CRISIL said Industrial activity will continue to face headwinds through the next fiscal as waning global growth weighs on export demand. Domestic demand is also expected to feel the pressure next year from external spill-overs and tighter domestic financial conditions.