India GDP growth slows in third quarter as exports fall

India posted annual economic growth of 6.3% in its July-September quarter, less than half the 13.5% growth in the previous three months as distortions caused by COVID-19 lockdowns faded in Asia’s third-largest economy.

Gross domestic product growth for the full fiscal year, which ends on March 31, is likely to be 6.8-7%, the government’s chief economic advisor V. Anantha Nageswaran said after the release.

That would be broadly in line with pre-COVID rates before pandemic lockdowns triggered wild fluctuations.

The rate for the September quarter, the second of India’s 2022/23 financial year, was just above the 6.2% forecast by economists in a Reuters poll.

Economists warned, however, that growth momentum may ease in the December quarter due to higher interest rates and slowing exports.

“Even as domestic growth drivers on services side continue to remain robust, weakening global demand amid tightening financial conditions remains the key risk for growth outlook for India,” said Garima Kapoor, economist at Elara Capital.

The Reserve Bank of India has raised rates by 190 basis points since May this year and is seen hiking again when its monetary policy committee meets in early December.

Slowing global growth has also started to hurt exports, which fell 17% over a year ago in October.

The Indian central bank sees GDP growth for the 12 months to March 31, 2023, at 7% but economists see risk of a downside to these forecasts.

Government capital spending increased more than 40% during the September quarter as the federal government stepped up expenditure on infrastructure from roads to railways.

Aided by pent-up demand, particularly for services, private consumption grew 9.7% compared to a year ago, while capital formation, an indictor of investment, increased 10% annually.

“Services on the supply side and investments in the demand side would continue to be the main drivers of growth,” said Sujan Hazra, chief economist at Anand Rathi.

Among key sectors, agricultural output rose 4.6% while manufacturing fell 4.3% and the employment-generating construction sector saw a 6.6% annual increase in activity.

“In case of manufacturing it has been clearly affected by low growth for the small business sector and fall in profits that has affected value added for the organized sector,” said Madan Sabnavis, chief economist at Bank of Baroda.

India plans to sustain its high growth rate through more government capital spending but will also focus on health and education next year, finance minister Nirmala Sitharaman told the Reuters NEXT conference on Wednesday.

Sitharaman was speaking amid consultations for the next budget, which is expected to be announced on Feb. 1. It will be the last full budget before national elections in 2024.

“We would continue to push capital expenditure, and that I’m saying even as I’m preparing for the next budget,” Sitharaman said. “We are well on course on meeting this year’s target. The states have shown extraordinary absorption capacity for taking the monies and spending on capital assets.”

The government sees the “capital expenditure route as one of those which can guarantee good growth,” she said.

India has budgeted capital spending of 7.5 trillion rupees ($92.28 billion) for the current fiscal year, which ends on March 31.

Sitharaman said that she looked forward to “a very good ... growing Indian economy this year and the next”. She was speaking ahead of the publication of July-September growth data, which showed the economy growing 6.3% on an annual basis.

Sitharaman said the government was comfortable with the country’s current foreign exchange reserves but believed that the rupee would stabilise without much intervention from the central bank.

Inflation, however, was being influenced by external factors for which measures needed to be taken, she said, adding the central bank saw “inflation is in the downward side and it will be well within the tolerance band by early next year or middle of next year”.

The private sector is starting to raise investments, she said, which augurs well for the economy that is projected to grow at 7% this fiscal year, despite many other economies suffering because of the Russia-Ukraine war.

“We are fairly comfortable in terms of agricultural supplies and energy, and there is buoyancy as regards to manufacturing,” she said.

“Newer areas are growing, sunrise sectors are being supported by the government, so I look forward to a very good, fast growing Indian economy in this year and the next.”