GDP upside may not sustain

The turnaround in export growth to positive territory in Q2 FY2024 played a key role in boosting GDP growth in the quarter.

India’s GDP growth print for Q2 FY2024 was expected to moderate sequentially from 7.8 percent in Q1 FY2024, on account of a normalising base and a weak agricultural outcome following the sub-par monsoon. While this materialised in the initial data for that quarter, the extent of the slowdown was exceedingly mild at just 20 bps; as a result, the GDP growth printed at 7.6 percent in Q2, well above our forecast of 7 percent, which was already above consensus (6.8 percent).

The stronger-than-anticipated growth turnout was largely driven by the manufacturing and the construction segments, with the two together contributing as much as 3.5 percentage points to the headline gross value added (GVA) growth print in the quarter as against just 1.5 percentage points in Q1 FY2024. These sectors benefitted from the long dry spell and the continued YoY decline in commodity prices, with the former boosting volumes and the latter reflecting in improved margins, and consequently higher GVA growth.

Some sectors reported GVA prints in line with our forecasts, including the tepid 1.2 percent rise for agriculture and the double-digit expansion for mining and quarrying, and electricity, gas, water supply and other utility services. The sub-par, uneven monsoons expectedly boosted the expansion of the latter two segments, by providing an extended period for mining activity and leading to a higher demand for electricity from the farm sector and households. That GVA growth in these sectors would be high was imminent from the elevated volume growth in both these sectors as per the IIP data.

Lastly, the three core services sub-sectors, namely trade, hotels, transport, etc., financial, real estate and professional services, and public administration, defence and other services disappointed with weaker than projected prints. To some extent, the reasons behind this could be the slowdown in services exports, continued monetary transmission and lower-than-budgeted growth of state governments’ revenue spending.

Capital Formation Robust

Among the expenditure side components, the growth of gross fixed capital formation (GFCF) surged to 11 percent in Q2 FY2024, reflecting the strong performance of construction activity as well as the robust growth in the GoI and state capex during the quarter. This boosted the share of GFCF in GDP (in nominal terms) to 30 percent in Q2 FY2024 from 29.1 percent in the year-ago quarter; this was the highest investment rate in any Q2 since Q2 FY2015.

Additionally, the turnaround in export growth to positive territory in Q2 FY2024 played a key role in boosting GDP growth in the quarter. However, the growth in private final consumption expenditure (PFCE) was quite underwhelming, at just 3.1 percent in Q2 versus 6 percent in Q1, partly reflecting the weakness in rural demand. However, the expenditure side data tends to undergo considerable revisions as more information becomes available, and the outcome of private consumption may not be as tepid as has initially been estimated by the NSO.

Notwithstanding the higher-than-expected GDP print for Q2 FY2024, we are apprehensive that growth will ease to around 5 percent in H2 FY2024. The base effect will continue to optically moderate growth in some sectors. Moreover, with the monsoons behind us and the YoY differentials in commodity prices expected to narrow going ahead, this double-digit performance across the industrial sub-sectors is unlikely to be sustained in H2 FY2024.

Further, the outlook for agriculture is particularly bleak, given the sharp decline in kharif output across major crops as well as subdued prospects for rabi output amid the lag in such sowing as per early data as well as low reservoir levels vis-à-vis historical levels. Consequently, we expect little-to-no growth in agri-GVA in H2 FY2024, with a contraction likely being prevented by outperformance in the non-crop segments, i.e., livestock, forestry and fishing, as has been seen in the past. Poor agri-GVA growth would weigh on rural demand and impact the output of segments such as FMCG and two-wheelers.

Monetary Tightening to Hurt

On the urban front, the cumulative impact of monetary tightening on household budgets is likely to weigh on demand in the near term. Furthermore, the recent tightening of norms for personal loans and credit cards by the RBI is likely to impact credit growth for these segments, which could also weigh on the discretionary consumption of urban households.

Among other factors, the ongoing weakness in external demand will continue to pose headwinds in the near term, akin to that seen in H1 FY2024.

Finally, we are apprehensive that the momentum of capex and execution of projects may slow down before the General Elections in early 2024. The GoI’s capex needs to grow by 30 percent YoY in H2 FY2024 to meet the full-year target for this fiscal, which appears unlikely with the monthly data for October 2023 pointing to a contraction. Likewise, to meet the target for FY2024, the capital outlay and net lending of a sample of 21 states would have to expand by ~28 percent YoY in H2 FY2024, which appears challenging in the light of the Assembly elections in some states in Q3 FY2024 and possible imposition of the model code of conduct ahead of the Parliamentary elections during Q4 FY2024.

Lastly, we want to caution against extrapolating base effect-led jumps in some high-frequency indicators such as the double-digit core sector expansion in October 2023, which are related to a shift in the festive calendar and will likely record a painful reversal in November 2023.

Amidst the aforesaid headwinds, we now estimate the FY2024 GDP growth at 6.2 percent, lower than the Monetary Policy Committee’s (MPC) projection of 6.5 percent, albeit higher than our earlier estimate of 6 percent.

Aditi Nayar is Chief Economist and Head - Research & Outreach, ICRA. Views are personal, and do not represent the stand of this publication.