India's world-beating GDP growth spurs exuberance, but sustaining it remains key

India's GDP growth is now projected to be 7.6% for 2023-24

India's blockbuster GDP growth of 8.4 percent in the third quarter of the current fiscal defied expectations, pegged at a three-quarter low of 6.5 percent, by a mile.

Economists were left positively surprised by the pace of growth seen in the December quarter which was buoyed by a sharp rise in manufacturing and construction activities at 11.6 percent and 9.5 percent, respectively. And, of course, due to a significant contribution from investments as seen in Gross Capital Formation (GCF).

Suman Chowdhury, Chief Economist & Head of Research, Acuité Ratings, termed the second advance estimates of GDP for FY24 "a major surprise."

Former NITI Aayog Vice Chairperson Rajiv Kumar called it "an unexpected positive surprise that should be accepted with the resolve to improve it further."

This cracker of a figure for the December quarter has also pushed up full-year GDP growth projections to 7.6 percent for 2023-24 from an already impressive 7.3 percent earlier. This is significantly higher than what economists had expected at 6.9 percent.

The numbers indicate a very strong economic momentum, especially when the current global economic landscape is still volatile, according to Vivek Rathi, National Director Research, Knight Frank India.

"The push to the economic growth has primarily come from investments, i.e. 12.2 percent growth in Gross Capital Formation (GCF). This suggests a shift in the economic landscape, where investments are gaining momentum. The growth in investments holds significance for the revival of the Capital Expenditure (capex) cycle in the economy, which, in turn, supports long-term growth," Rathi added.

Beyond the headline

Though the growth rate unexpectedly accelerated to 8.4 percent in the December quarter, economists pointed out the divergence between GDP and Gross Value Added (GVA) growth, which was driven by a rise in net tax collections and a sharp decline in subsidy spending.

The overall GVA growth in October-December 2023 was 6.5 percent, down from 7.7 percent in July-September, while the full-year GVA growth has been pegged at 6.9 percent, up from 6.7 percent in 2022-23.

"The Q3 data on India's growth threw up a divergent trend, with the GVA growth moderating broadly on expected lines and GDP expanding much higher than anticipated. This wide gap followed from a surge in the growth of net indirect taxes to a six-quarter high of 32 percent in this quarter, which is unlikely to be sustainable. In our view, it may be more appropriate to look at the trend in the GVA growth to understand the underlying momentum of economic activity," Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd, said.

Gaura Sen Gupta, India Economist, IDFC First Bank concurs. The GVA growth shows that recovery has slowed in Q3 of FY24, as companies start losing support from lower input costs. "From the expenditure side also overall growth momentum for consumption remains muted with investment remaining the key driver for growth," Sen Gupta said.

Another reason behind the better-than-expected GDP growth in October-December 2023 is a favourable base effect, with the Q3 2022 GDP growth rate being revised down to 4.3 percent from 4.5 percent.

Rajiv Kumar explains that the revision of the previous year's Q3 numbers or the base effect has contributed significantly to the unexpectedly high growth figures for the third quarter of 2023-24. "Manufacturing sector growth may also need to be looked at in detail as most FMCG companies were reporting sluggish sales in the third quarter of the current fiscal," he added.

While manufacturing and construction remained bright spots for India's GDP growth, agriculture continued to witness a declining trend with the sector's GVA contracting by 0.8 percent in the third quarter of FY24.

"Uneven monsoon had impacted kharif output, which is reflected in decline in agriculture growth," Sen Gupta said. Yet another area of concern, according to experts, is the private consumption growth, which is sluggish at 3.6 percent in the December quarter.

Investment-led growth

The December quarter reveals that GDP growth has been primarily led by the government's capital expenditure push, while consumption growth remains feeble.

"Going forward, the most critical aspect to watch out for will be a broad-based improvement in consumption growth. The other critical aspect would be a meaningful improvement in private investment. Overall robust GDP growth will be sustainable only when there is a meaningful improvement in consumption and private investment," according to Rajani Sinha, Chief Economist, CareEdge.

Investments emerged as the fastest growing component of GDP in Q3 FY2024, and displayed a mild sequential dip, contrary to the sharp slowdown seen in government capex, Nayar said.

"The ongoing growth momentum is indicative of the Indian economy’s resilience, notwithstanding global headwinds. However, there are risks as well. Aggregate demand is largely driven by the government capex. Prevailing consumption demand is highly skewed in favour of goods and services consumed by the households belonging to the upper 50 percent of the income bracket and therefore not broad based," as per India Ratings' Sunil Kumar Sinha and Paras Jasrai.

The central government's capital expenditure was down by a whopping 41 percent YoY at Rs 47,557 crore in January 2024. Though, for the first 10 months of the current fiscal, the number is still up 27 percent at Rs 7.21 lakh crore.

While some experts did raise concerns over whether a growth, primarily driven by the government's capex push is sustainable or not given that private investment continues to be tepid, the resilient GDP figures for the December quarter offered hopes of better numbers in the coming fiscal as well.

"Importantly, high-frequency growth indicators continue to stay robust, suggesting strong growth prints during 2024-25 as well. Strong growth coupled with projections of softening in inflation prints in the coming quarters offer a meaningful cushion for policymakers," said Siddhartha Sanyal, Chief Economist of Bandhan Bank.