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Pencilling in just 4% GDP growth for the fourth quarter, a rating agency report has said the final growth numbers for the full year will be lower than the second advance estimate of 7%.

The economy grew at 13.2% in the first quarter and 6.3% in the second three-month period due to base effect and much lower than the consensus expectation of 4.4% in the third quarter. To close the full fiscal with a 7% growth, the GDP should deliver at least a 4.1 % uptick.

India Ratings analyst Paras Jasrai in a report said the agency expects GDP to print in at around 4% in Q4, which would mean GDP growth for FY23 could be lower than 7% but did not quantify the same.

The National Statistical Office, in its second advanced estimate, has retained GDP growth at 7 % for the full year, which factors in a growth of 5.1 %. However, the agency sees many downside risks to this estimate, such as the pent-up demand, which had provided thrust to growth, is normalising; exports that had been buoyant are facing headwinds from the global slowdown and credit growth is facing tighter financial conditions.

The ongoing spell of elevated temperatures in the north in February has raised concerns regarding wheat production.

In addition, the Indian Meterological department warned of the plausibility of severe heatwaves during March-May. This can not only affect agricultural output, which has been pegged to grow at 4.3 % in Q4, but also keep inflation at elevated levels that can impact rural demand, which has been under stress since the pandemic, Jasrai explained.

The growth moderated to a three-quarter low of 4.4% in Q3 as against the consensus projection of 5.1%, pulled down by the poor show by manufacturing and exports, among others.

The gross value added (GVA), which is the value of production, grew 4.6 % in Q3. The difference between GVA and GDP is indirect taxes net of subsidies.

Though typically GDP growth is higher than GVA growth, the net taxes in Q3 were at a seven-quarter low of 1.4% due to higher subsidies, and as a result, GVA growth in Q3 was higher than GDP growth.

Since the base effects after the pandemic have complicated growth comparisons, a better way to analyse the numbers is to compare them with the pre-pandemic period (Q3 FY20) to ascertain recovery. Thus the compounded annual growth during Q3 FY20-Q3 FY23 stood at 3.7 %, which remains much lower than the comparative numbers of 5.4 % during Q3 FY17-Q3 FY20, as per the report.

Further confounding the growth expectations are the fall in merchandise exports, which contracted 6.6% to $32.91 billion in January. This was the second successive month of contraction, mirroring an anaemic manufacturing activity.

Like exports, even merchandise imports fell 3.6% in January to $50.66 billion, owing to a decline in commodity prices. This was the sharpest fall in 25 months.

On the positive side, the trade surplus in services almost doubled to $16.48 billion in January from $8.39 billion a year ago. As a result, the overall trade deficit improved to $1.26 billion in January from $8.95 billion in January 2022, which was $6.65 billion in December 2022.

Another downside risk is the low liquidity in the banking system, after remaining in a huge surplus since the beginning of the pandemic. The liquidity in the banking system slowed to a four-month low of 0.43% of the net demand and time liabilities in January from 0.53% in December 2022 due to a robust credit demand in January.