India held on to its tag of being the fastest-growing economy in the world, with the Gross Domestic Product (GDP) growth rate coming in at 7.6 percent in the July-September 2023 quarter, largely led by a surge in the manufacturing and construction sectors.
The GDP print for the second quarter has been a positive surprise for policy makers and economists as it significantly beat the consensus estimate of 6.8 percent for the period.
Emkay Global’s lead economist Madhavi Arora attributes the better-than-anticipated GDP print for July-September to robust corporate profits, a strong fiscal impulse, with government spending being front-loaded in a pre-election year, and a boisterous financial sector, led by easier lending standards and higher credit growth.
Acuité Ratings and Research’s Suman Chowdhury and ICRA’s Aditi Nayar said that an acceleration in the manufacturing sector to 13.9 percent year-on-year in Q2 of FY24 led to the stronger GDP print for the period.
Many are now willing to revise their earlier projections for GDP growth in the current fiscal. ‘Full-year growth to surprise on the upside’
Given the performance in the second quarter, Sanjeev Sanyal, a member of the Prime Minister’s Economic Advisory Council, now expects full-year growth to surprise on the upside.
“Indian economy registered a strong growth in Q2 and high-frequency indicators suggest that momentum will be strong in Q3 as well. The full-year growth for 2023-24 is now likely to be in the upper end of the 6.5-7 percent range,” Sanyal said on X (formerly Twitter) on November 30.
Anand Rathi Shares and Stock Brokers is now estimating full-year growth for 2023-24 to be at least 20 basis points better than their previous forecast of 6.2 percent. ICRA has revised its projection to 6.2 percent from 6 percent earlier.
The Economic Survey for 2023 projected real GDP growth for the current fiscal in the range of 6-6.8 percent, "depending on the trajectory of economic and political developments globally".
Prime Minister Narendra Modi took to X (formerly Twitter) on November 30 to highlight how the GDP growth figure for the second quarter of this fiscal displayed the resilience and strength of the Indian economy amidst testing times globally.
Rural demand continues to falter
However, despite the widespread euphoria around the headline figure, a closer look at the data reveals that rural demand continues to falter.
Private final consumption expenditure (PFCE) was a let-down as growth nearly halved to 3.1 percent in Q2, from 6 percent in Q1. Another disappointment was the agriculture sector that grew a mere 1.2 percent in July-September, its slowest expansion in four and a half years.
“The data doesn’t look that good on the consumption side with PFCE growing by only 3.1 percent on year. In our opinion, this is largely due to a weakness in rural demand and it is being reinforced by the low growth in the agricultural sector which has been pegged at 1.2 percent on year,” says Suman Chowdhury, Chief Economist and Head, Research, Acuité Ratings and Research.
Looking ahead
While most economists acknowledged the breakneck speed of India’s GDP growth, they raised concerns around a plausible slowdown in the second half of the current fiscal.
ICRA’s Nayar predicts a significant moderation in GDP growth in October-March “with the continuing headwinds such as the normalising base, weak outlook for agriculture output and rural demand, tepid global growth, narrowing differentials in commodity prices and transmission of past monetary tightening.”
Both Nayar and Emkay’s Arora flag relatively slower spending by the government, with the upcoming parliamentary elections as another reason for a possible loss of pace in India’s world-beating growth in the second half of the fiscal.
But as Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, puts it, even as growth is expected to moderate in H2, the full-year GDP numbers have got a big fillip due to the Q2 print.
Former NITI Aayog Vice-Chairman Rajiv Kumar told Moneycontrol that economic recovery is based on solid grounds since other sectors (beyond manufacturing) have also shown positive growth in Q2.
Even as Kumar expects India’s GDP growth rate to be higher than 6.5 percent for the full fiscal year, he agrees that whether it will be able to sustain the current whirlwind pace in the coming quarters is an “open question”.
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