Tale of two halves: GDP growth moderates in Q2, but early signs of rebound seen in second half

While the prospects seem brighter, inflation remains the elephant in the room that can potentially spoil the recovery party in the second half

India’s real or inflation-adjusted gross domestic product (GDP) grew 5.4 percent in the second quarter (July-September). This is a sharp moderation from the 8.1 percent growth in the second quarter of 2023-24, and 6.7 percent expansion in the first quarter (April-June) of 2024-25.

A significant part of the moderation in India’s growth during the July-September quarter can be gauged from how households have been spending. Consider passenger vehicle sales, a useful proxy to assess urban households’ spending propensity and appetite.

During all the three months of the quarter, passenger vehicle (excluding two wheelers) sales had contracted, meaning that at an aggregate level people bought fewer cars compared to the same period in the previous year.

Commercial vehicle sales, too, contracted 11 percent during the quarter. A drop in commercial vehicle sales, usually, can be seen as a proxy for muted demand in the broader economy. The need for lorries to ferry products from factories to retail outlets come down during times when people are buying fewer goods. This seemed to have played out during the second quarter.

Likewise, for rural demand. Tractor sales were sharply muted during July-September, contracting 0.16 percent on an average during the three months.

These are showing up in the GDP numbers, too. Gross value added (GVA), which is GDP minus taxes and is, therefore, seen to be a more realistic proxy to measure economic activity, in manufacturing sector grew 2.2 percent in the second quarter (July-September) of 2024-25 compared to 14.3 percent growth in the same period of 2023-24 and the 7 percent expansion in the first quarter of (April-June) 2024-25.

The other two components of the secondary sector—electricity, gas, water supply and other utility services; and the construction sector—too moderated considerably on a comparative scale.

Electricity and other utility services 3.3 percent during the quarter compared to 10.5 percent in the same period in 2023-24 and 10.4 percent in the previous quarter (April-June 2024). The construction sector’s growth moderated to 7.7 percent during July-September this year, compared to 13.6 percent in the corresponding period of the previous year and 10.5 percent in the first quarter (April-June) of 2024-25.

A part of the tepid household demand during the previous quarter can be attributable to a late festive season this year, which kicked-in in October, which is when private consumption seems to have found its mojo back, triggering optimism that India’s economic trajectory during the year, broadly, could turn out to be a tale of two halves.

Consumption rebound

The latest batch of high-frequency indicators suggests that India's economy has regained some momentum in October. Let’s look at the numbers. Passenger vehicle sales swung back into positive territory growing 0.9 percent in October (year-on-year). Tractor sales surged 22.4 percent during the month, a sign of sharp rebound in rural demand. With the kharif output expected to be robust and optimism around rabi production, the stage is set for a record foodgrains target for 2024-25.

A distinctive characteristic of household spending on vehicles in India is that they are also an effective indicator of consumer demand. Most of these vehicles are bought on loans.

A key determinant of the decision to buy a car or a tractor is not just current income, but also what people think about their future income, and what they foresee about their ability to finance this buy over a five to seven year period. Growing passenger vehicle and tractor sales, therefore, can be reflective of incipient signs of rising consumer confidence.

Export resurgence

India's merchandise exports have also shown a resurgence. In October 2024, exports grew by 17.2 percent year-on-year to $ 39.2 billion, driven by a strong momentum and a favourable base effect.

As many 25 out of 30 major commodities, accounting for 72.8 percent of the export basket, expanded on a year-on-year basis in October. Engineering goods, electronic goods, organic and inorganic chemicals, rice, and ready-made garments (RMG) of all textiles were India’s principal growth engines.

In macro-growth analyses, inter-country growth comparisons can sometimes be a handy marker. India’s sub-7 percent growth towers over the rest of the advanced and emerging economies, partly showing why even during a period of subdued global growth, India has been gaining share in global trade of key manufacturing items.

During the same quarter (July to September 2024), USA grew 2.8 percent, UK’s economy crawled at 0.1 percent, Japan managed a barely 0.9 percent economic expansion, Germany’s growth just about managed to stay positive at 0.2 percent, while Italy and France scrambled to stay afloat with both growing 0.4 percent. China, the world’s second largest economy, expanded 4.6 percent, which is still far behind India’s expansion.

Besides, there is also the high likelihood of a strong uptick in the government capital expenditure in the second half of this fiscal, both by the Centre and the states. This could release the expected, and attendant, trigger for private capital expenditure, too, although with a time lag.

Inflation blues

While the prospects seem brighter, inflation remains the elephant in the room that can potentially spoil the recovery party in the second half. India's headline retail inflation slipped out of the central bank’s outer tolerance band and scaled a 14-month high of 6.21 percent in October.

What would worry policymakers is that non-food, non-fuel inflation or what economists describe as core inflation has shown signs of inching up. This could potentially hurt people’s real incomes, and hurt their spending ability. Similarly for companies too, as rising input costs could shave off earnings, affecting the capital expenditure plans.

It is, therefore, not for nothing that the Reserve Bank of India (RBI) remains relentlessly focussed on keeping the inflation genie firmly bottled up.