GDP Data: High growth to delay monetary easing

Indian GDP grew by a faster-than-anticipated 7.8% in Q4 FY2024.

The plethora of data released on May 31st has provided multiple insights into how the Indian economy has performed, in Q4 FY2024 as well as April 2024. First, Indian GDP grew by a faster-than-anticipated 7.8% in Q4 FY2024, although it expectedly eased to a four-quarter low. In spite of this, the full year GDP expansion clocked an envious 8.2%. Sticking with the real sector, the eight core industries’ expansion improved to 6.2% in April 2024 from 6.0% in March 2024, despite a collapse in the cement output growth.

While the headline growth numbers certainly look extremely encouraging, we must delve into why the GDP growth slowed down in Q4 FY2024, to help gauge the prospects for FY2025. The sequential slowdown in GDP growth was driven by investment activity, which we expect will show a back-ended pickup in H2 FY2025 after the Budget and the monsoons. Private final consumption expenditure maintained a modest 4.0% rise in Q4 FY2024, whereas government final consumption expenditure, continued its volatile quarterly pattern seen in H1 FY2024, turning around to a mild growth in Q4 from a contraction in Q3.

Growth Driven by Industrial Sector 

The sequential deceleration in the gross value added (GVA) growth to 6.3% in Q4 FY2024 from 6.8% in the previous quarter, was predominantly driven by the industrial sector, both on account of a dip in volume growth as well as the fading benefit provided by benign commodity prices. Nevertheless, the expansion in manufacturing and construction remained quite robust, exceeding 8.0% in Q4 FY2024. Moreover, growth in the trade, transport etc. component of the services sector dampened in Q4 FY2024 vis-à-vis the previous quarter, as had been alluded to by various lead indicators.

Interestingly, the agricultural GVA growth was revised up for Q3 FY2024, amid the upward revision in the output of crops in the Second Advance Estimates (AE) vis-à-vis the First AE. Nonetheless, the impact of the unfavourable 2023 monsoon lingered, with a marginal 0.6% YoY rise in agri GVA in Q4 FY2024.

Monsoon Forecast and its Impact on Numbers

Looking ahead, the India Metereological Department’s (IMD) 2nd long range forecast of an above-normal monsoon in 2024, combined with development of La Nina conditions in the later part of the season is likely to support the kharif crop output, although excessive rainfall concentrated during short periods of time, could have an adverse impact. Besides, it will also aid in replenishing reservoir levels, which would augur well for the rabi crop prospects. We expect rural demand to improve in H2 FY2025, once households have some concrete visibility around the farm cash flows from rabi procurement, monsoon volume and distribution, and outcomes for the next kharif crop.

We anticipate urban consumption to remain upbeat, albeit uneven in FY2025, with the high-income households and new entrants into formal labour markets driving demand. However, the tightening of norms for personal loans and credit cards by the RBI could adversely impact credit growth for these segments, which may weigh on discretionary consumption.

Moving to the fisc, the Government of India’s (GoI’s) fiscal deficit was contained at 5.6% of GDP, below the Revised Estimate (RE) for FY2024, benefiting from the favourable combination of higher than anticipated receipts and lower than estimated revenue spending, with only a marginal miss in the capital expenditure.

Jump in Fiscal Deficit 

Curiously, the fiscal deficit for April 2024 has jumped sharply, in spite of the ongoing Parliamentary elections, which are typically thought to temporarily subdue spending. Nevertheless, the windfall on its way from the Reserve Bank of India’s (RBI’s) higher-than-budgeted dividend will certainly dampen the fiscal deficit in the rest of this quarter. The full year Budget likely to be presented in July 2024 will provide cues for the rest of the year, both for revenue and capital spending, which will influence the trends in the investment activity and government final consumption expenditure for this year.

Interestingly, the wedge between the GDP and GVA growth narrowed only slightly to 148 bps in Q4 FY2024 from the soaring 178 bps in Q3 FY2024, amid the high 22.2% growth in net indirect taxes in real terms; the latter had benefited from contracting subsidies. With such a high growth of net indirect taxes unlikely to sustain in FY2025, we expect GDP and GVA growth to print closer to each other, especially in terms of the annual numbers (GDP 8.2% and GVA 7.2% in FY2024).

With transient factors likely to dampen growth in H1 FY2025, we expect the GDP growth to decelerate from the 8.2% recorded in FY2024 but remain robust. Monetary easing, therefore, may be further delayed.