Moneycontrol Pro Weekender: Q1 GDP numbers provide comfort on both consumption, private capex

The official numbers show that consumption is finally trickling down to the masses and is becoming more broad-based.

Dear Reader,

GDP data releases are non-events for the market, unless they presage policy action that could affect interest rates and corporate earnings. Since the real GDP growth of 6.7 percent in Q1, FY25 is lower than the 7.1 percent pencilled in by the Monetary Policy Committee, or the 7.4 percent estimated by the RBI researchers in their State of the Economy report, or even the 7 percent median estimate of RBI’s professional forecasters’ panel, does it mean that the RBI may reconsider its obsession with getting inflation down to 4 percent and focus more on growth?

Not really, because growth in real Gross Value Added (GVA) in Q1 is much higher, at 6.8 percent, than the median estimate of 6.4 percent by RBI’s professional forecasters.

What’s more, private consumption has shown year-on-year growth of 7.5 percent, a welcome change from the tepid growth in earlier quarters. That’s a big improvement from the 4 percent growth in Q4, FY24 and it shows that consumption is finally trickling down to the masses and is becoming more broad-based.

That’s not all. Despite widespread fears of a slowdown in capex due to the elections, gross fixed capital formation growth was 7.5 percent in Q1 FY25, compared to 6.5 percent in the previous quarter. Private capex therefore must have picked up.

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Manas Chakravarty

Group Consulting Editor|Moneycontrol

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GDP has been pulled down in Q1 as a result of the drag from net exports of goods and services on the one hand, and lower government consumption expenditure on the other.

GVA growth in the agriculture and allied sectors is 2 percent in Q1, compared to 0.6 percent in the previous quarter. Growth in construction is very strong, at 10.5 percent y-o-y. Growth in the trade, transportation, communications sector has also picked up. Both agriculture as well as construction and trade and transport are sectors that provide a lot of jobs for the masses. Stronger growth in these sectors therefore augur well for the growth of consumer demand. The growth in construction and trade and transport is particularly commendable because they have come on top of high growth in the year ago quarter.

Growth in manufacturing slowed down in Q1, FY 25, but that is mainly on account of higher growth in the year ago quarter—an unfavourable base effect.

We had pointed out here that if consumption growth is strong, it will lead to further corporate capex, while the central government has already in its budget announced its intention of pushing its capex. Fitch Ratings too has pointed out that the key risk to growth is if the private investment cycle does not pick up as a result of subdued consumption, which would weigh on job creation. The Q1, FY 25 GDP/GVA data have provided much comfort on that front. Also, as our Monsoon Watch column said, the monsoons so far have been relatively good, which should keep inflation in check, thereby aiding consumption demand.

US GDP growth too has been good, coming in at an annual rate of 3 percent in the June quarter, beating estimates and well ahead of a tepid 1.4 percent growth in Q1. Consumption spending rose at a 2.9 percent annual rate. That indicates the US economy is far from weak. That should reinforce the soft landing narrative. Perhaps Jerome Powell’s well-telegraphed September rate cut is a pre-emptive measure, rather than a reaction.

The regime change at the Fed, from tightening to loosening, will be accompanied by a regime change in the US markets, seen from the topping out of the Nvidia share and the abating of some of the AI frenzy. As this FT story, free to read for Moneycontrol Pro shareholders, said, ‘’The regime change has been under way since Nvidia peaked on June 18. Since then, tech has been a drag on the broader market, while falling interest rate plays like real estate, utilities and financials, as well as defensives such as healthcare and consumer staples, have stood out.’’ This story put it succinctly—Nvidia’s Wow factor might be fading.

Rate cuts in the US could also be the catalyst for emerging markets. After all, there are strong fundamental reasons for it. Ruchir Joshi, writing in the FT, says, ‘’After weakening sharply in the past decade, emerging economies are rebuilding their growth lead over developed economies, including even the strongest one, the US, to levels not seen in 15 years. The proportion of emerging economies in which per capita GDP is likely to grow faster than the US is on course to surge from 48 per cent over the past five years to 88 per cent in the next five.’’

And with India’s strong growth, it’s little wonder that the question being asked is: Will a dovish US Fed trigger a sustained bull run? Fund-tracker EPFR said of the week ending August 21, ‘’ While fund groups with emerging Asian mandates continue to be the major driver of overall flows, the latest week saw the diversified Global Emerging Markets (GEM) Equity Funds post their biggest inflow since mid-May.’’

If foreign portfolio inflows into India turn net positive, it will further add to the huge amount of domestic liquidity already sloshing around in the markets. One example of that liquidity is the Premier Energies IPO—this Rs 2830 crore IPO received bids worth more than Rs 1.48 lakh crore. Moneycontrol Pro’s Sachin Pal, writing about the IPO, had recommended, "Considering the euphoria surrounding recent public listings, investors could look to subscribe into the IPO for listing gains.’’ Investors seem to have taken his advice to heart. The hysteria in SME IPOs about which we wrote here and here, is another indication of irrational exuberance. FT columnist Gillian Tett says that markets should beware of becoming too complacent.

No wonder then that some investors are asking, as Larissa Fernand writes: ‘’Sell or hold? Buy or wait?” She says those questions should be followed by another one: “If I end up making a mistake, which mistake will I regret less?’’

Cheers,

Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

SAMHI Hotels, What makes us cautious on CreditAccess Grameen despite strong return ratios, LIC Housing Finance, PVR INOX,

ECOS India Mobility IPO, Control Print, RIL’s bonus issue, Fertiliser stocks, Power Grid, RIL, Baazar Style IPO, Weekly tactical pick, Rainbow Children’s Medicare,

Markets

The disconnect between the reaction of Fed Funds market and US equities after Powell’s speech

Korean giants target Indian investors

Financial Times

This gold rush has staying power

China’s debt divide is hurting its economy

What politicians forget in the immigration balancing act

Companies and sectors

What BHP’s commodity outlook says about copper, iron ore

Kirana’s FMCG channel share is steady in 2024, so where’s the threat?

Cement makers firm up capacity addition plans

DLF

Deteriorating farm incomes in US can pose fresh challenges to agriculture inputs exporters

Are MFIs pushing too much credit to the borrower?

Large companies are getting stronger in Indian pharma market

High attrition may cool off for banks

Growth potential sees competition hotting up in Quick Commerce

RIL’s bonus bonanza

More Indians are becoming credit aware to be credit worthy

Economy and policy

Government dilutes NPS as political compulsions gain the upper hand

Unified Pension Scheme – Two birds with one stone, or a step back in time?

What the income tax data tell us about the premiumisation trend

ULI can make the credit process quicker; the tricky part is recovery

The red herring of bank deposits being diverted to mutual funds

Rules key to success of personal data law

Decoding Economics: Who uses Generative AI and for what?

Pro Economic Tracker

Ensuring responsible AI in finance: A suggested regulatory framework for India

Sporadic bans won’t fix the ‘’irrational drugs’’ problem

Geopolitics

Growing anti-India sentiment in Bangladesh

Does India have any real influence on today’s geopolitical rivalries?

What do stronger ties with Singapore mean for India?

Personal Finance

How to give your SIP a booster dose

Why are aggressive hybrid funds a good bet in volatile markets?

Is Net SIP a misnomer?

Niche, narrow mutual fund themes may get messy for investors: Jitendra Sriram, Baroda BNP Paribas MF