GDP: Services sector stands out as a growth engine, but an erratic monsoon could play party pooper

Image for Representational Purpose only

The hum of an economy on the turn can be heard in crowded restaurants and hotels. Another marker of economic energy is the level of activity in the property market and in financial and other business services such as consulting. If people are eating out more than earlier, if more people are checking into hotels for leisure, and if households are parking more funds in financial products, more often than not, these serve as proxy indicators of the pace and direction of the broader economy.

A greater level of spending in these and related sectors would, other things remaining the same, signal more discretionary spending power and higher household savings. And there are signs of these in the Indian economy. The latest national income data for the first quarter (April-June 2023) bears this out.

The provisional estimates of national income for the first quarter of 2023-24, put out by the National Statistical Office (NSO) on August 31, show that India’s real, or inflation-adjusted gross domestic product (GDP), grew 7.8 percent during April-June this year, the highest in four quarters. The standout characteristic of this growth has been the momentum of the services sector. During the quarter, the gross value added (GVA) — i.e., GDP minus taxes, considered a better metric to measure economic activity — in trade, hotels, transport, communications, and broadcasting grew 9.2 percent in real terms, despite a very high base of 25.7 percent growth in the same quarter of the previous year.

Real estate, and financial and professional services also demonstrated serious economic muscle. All told, GVA in these sectors grew 12.2 percent during the quarter, compared to 8.5 percent in the same quarter the previous year, a probable sign of buoyant consumer confidence, and perhaps, greater household savings.

Property purchase is less about people’s current income levels and more about what they think about their future income. India’s vast middle-class mostly buys houses based on their ability to repay loans that usually last longer than a decade. Even cars are bought on loans. Purchase of private vehicles grew a healthy 10.8 percent during April-June this year, despite a significantly high base of 51.5 percent expansion in the same quarter the previous year.

When companies, individuals, and households take loans, it’s a sign that they are feeling more confident about their business and income prospects, confident enough to commit themselves to long-term loans for buying houses and cars and to invest in their businesses. The evidence in the national income data indicates a trend towards this.

Bank deposits grew 12.9 percent during April-June this year, compared to 8.6 percent in the year-ago period, a broad indicator of greater household savings. Equally importantly, bank credit expanded 16.2 percent during the quarter, up from 13.4 percent growth in the year prior, a sign of higher borrowing / investment by corporates and households.

The construction sector also recorded healthy growth. Its GVA grew 7.9 percent during this April-June, keeping pace despite the high base of 16 percent growth in the same quarter the previous year. Road and other infrastructure projects can spur economic activity, boost construction, and create jobs.

There are two potentially problematic areas, though. One, the impact of the erratic monsoon this year will probably show up during the next two quarters. Although real GVA in agriculture grew 3.5 percent during the quarter, up from 2.4 percent growth in the same quarter in the year prior, a weak kharif crop, which accounts for two-thirds of India’s total foodgrain output, could cascade through the consumption economy by way of lower sales of household appliances and motorbikes, among others.

Two, the manufacturing sector appears a trifle shaky, its real GVA growth moderating to 4.7 percent, from a 6.1 percent expansion in the same period of 2022-23.