India’s real gross domestic product (GDP) grew year-on-year by 6.3 per cent in the second quarter of 2022-23. This was significantly lower than the first quarter growth print of 13.5 per cent. The halving of GDP growth cannot be mistaken for a slowdown. It, in fact, is a normalization of growth. The double-digit growth in the first quarter had come on top of an exceptionally favourable base as the first quarter of both, 2020-21 and 2021-22 was hit by Covid-19 infections and consequent restrictions of mobility and business operations. The rate of year-on-year growth recorded in the June 2022 quarter therefore was not normal and therefore not sustainable.

The recovery of the Indian economy continued in the September 2022 quarter notwithstanding elevated inflation, rising lending rates and external headwinds. Deviating from the seasonal trend of a quarter-on-quarter fall in the September quarter, GDP increased by 3.6 per cent in the September 2022 quarter over the June 2022 quarter this year. This was in contrast to the 1.2 per cent sequential mean GDP contraction seen by India in the July-September quarter of the last two decades. The median fall in GDP was not very different from the mean, at 1.1 per cent.

Buoyancy in consumption demand was primarily responsible for India bucking its historical trend of a sequential contraction in the September quarter. Private final consumption expenditure (PFCE) in the September 2022 quarter grew by one per cent over the June 2022 quarter. PFCE usually contracts between the quarter ended June and September. The mean quarter-on-quarter fall in PFCE for the September quarter registered in the last two decades was 7.1 per cent and the median fall was 8.9 per cent. This makes even the marginal sequential growth recorded in the September quarter this year quite impressive.

Private consumption demand in the September 2022 quarter was strong even when compared to the same quarter of last year. PFCE during the quarter was up year-on-year by 9.7 per cent. While a bulk of the consumption was not credit driven, net disbursal of personal loans by SCBs as proportion of PFCE increased to 4.5 per cent in the September 2022 quarter as compared to a 3.5 per cent in the preceding as well as the year-ago quarter.

The government did not contribute to consumption growth in the September 2022 quarter. It, in fact, was a drag on the economy’s growth. Government’s final consumption expenditure, which comprises of revenue expenditure excluding interest outgo of both, the central and the state governments, contracted in the September 2022 quarter. Sequentially, it was down by 18.9 per cent and when compared year-on-year, it was down by 4.4 per cent.

Investment demand, measured by gross fixed capital consumption (GFCF), grew year-on-year by 10.4 per cent in the September 2022. The growth was primarily driven by government’s capital expenditure, particularly by the central government which grew by 42.4 per cent in nominal terms. Aggregate capital expenditure by 26 state governments increased year-on-year by 10.6 per cent. Real estate development too is believed to have increased at a brisk pace. Governments account for a little over 15 per cent of the capital formation in India while the household sector accounts for around 40 per cent. The balance comes from private corporates. Most corporates are not game for investing in big ticket capacity expansion projects until their capacity utilization improves from the current 72 per cent. They are going slow on capacity expansion till they get sure about the sustainability of consumption demand growth. The disinterest of corporates in capacity expansion is visible in the mere 3.5 per cent year-on-year growth in net fixed assets of about 3,100 listed non-finance companies as of September 2022.

The inadequate private corporate participation arrested the sequential improvement in overall GFCF to 3.4 per cent in the September 2022 quarter. The growth was below the long-period mean and median growth of 6.1 per cent and 5.4 per cent, respectively.

The boom in India’s foreign trade continued into the September 2022 quarter. Both, exports and imports grew at a faster pace than their average, sequentially as well as year-on-year. But, the growth in imports was much steeper than that of exports which led to a huge trade deficit. The deficit ate into 8.6 per cent of GDP in the September 2022 quarter. This is the highest dent received to the GDP from foreign trade in a decade.

A strong cushion of domestic demand has so far helped the Indian economy protect its growth recovery from these external headwinds.