Q1 GDP: Mildly disappointing growth print

GDP growth

The Indian economy expanded at a pace of 7.8 percent in Q1 FY2024, measured both in GDP and gross value added (GVA) terms, with the latter driven by a double-digit expansion in services (+10.3 percent) and a relatively sedate outturn of industry (+5.5 percent) and agriculture (+3.5 percent).

While growth was indeed at a four-quarter high, this did benefit from the lingering impact of a supportive base, given that we had just started to shed our pandemic-induced anxieties in Q1 FY2023. Therefore, looking at the sequential improvement in the pace of expansion (from 6.1 percent in Q4 FY2023), or comparing segmental growth trends with those seen in Q1 FY2023 are equally unhelpful.

How then should we interpret these numbers?

Regardless of the optically high level led by the base effect, the pace of growth trailed both our forecast of 8.5 percent, and that of the Monetary Policy Committee (8.0 percent). A major sector that saw growth printing below our expectations was manufacturing (+4.7 percent), belying the awaited benefit of improved margins given the YoY cooling of prices of many commodities. Weak exports are likely to have been the culprit. Curiously, trade, hotels, transport, communications and services related to broadcasting reported a 9.2 percent YoY expansion but remained 2 percent below its pre-COVID levels. On an optimistic note, this suggests that the recovery in services has some more distance to cover, which should support overall growth in the current quarter. Interestingly, no other sub-sector of GVA trailed its pre-COVID level in this quarter, which is also good news.

In terms of the expenditure side components, the growth of gross fixed capital formation (GFCF) stood at a healthy 8.0 percent in Q1 FY2024, amid the robust performance of a variety of investment-related indicators, as well as frontloading of capital spending by the government of India (GoI) and the state governments during the quarter. Further, the share of GFCF in GDP (in nominal terms) rose to 29.3 percent in Q1 FY2024 from 29.1 percent in Q1 FY2023; this was the third consecutive quarter of a YoY uptick in this metric, pointing towards a sustained, albeit mild, increase in the investment rate.

Private final consumption reported a growth of 6.0 percent in Q1 FY2024; further, the pickup from the muted 2.8 percent in Q4 FY2023, entirely accounted for the rise in the headline GDP growth between these quarters. Government final consumption expenditure, on the other hand, contracted by 0.1 percent in Q1 FY2024, reflecting a decline in the GoI’s non-interest non-subsidy revenue expenditure in that quarter.

Growth To Weaken

Looking ahead, we are certain that the YoY growth figures are going to lose steam as the year progresses, on account of a below-normal monsoon outturn, narrowing differentials with year-ago commodity prices, and a possible slowdown in momentum of government capex as we approach the Parliamentary elections. The ongoing weakness in exports is also a cause for concern.

The deficient rainfall in August 2023 suggests that this monsoon season is almost certainly going to end up below normal. While the aggregate area sown for kharif crops is marginally higher than year-ago levels, there are lags in the sowing of some key items. Moreover, weak rains since August 2023 could adversely impact yields. Additionally, deficient rainfall holds implications for reservoir and groundwater levels, which would affect the area sown under the rabi crop.

All of this suggests that rural demand will remain cautious. Where inflation settles, especially during the crucial festive season, would guide urban sentiment and spending. 

The outlook for investment demand is supported by the sizeable expansion in the GoI and states’ budgeted capex for FY2024, a surge in capex-related ECB approvals in recent months, and the jump in new project announcements in the last fiscal. However, execution of government capex may slow down closer to the Parliamentary elections, which means private sector capex will have to step on the gas to maintain the momentum.

For now, we are maintaining our FY2024 GDP growth estimate of 6.0 percent, which is lower than the MPC’s projection of 6.5 percent for the fiscal. Additionally, the Q1 GDP reading does not boost the as-yet-mild probability of an imminent rate hike from the MPC, notwithstanding the surge in the CPI inflation in July-August 2023. We believe inflation would need to exceed the MPC’s projections for at least two quarters, amid evidence of generalisation of food inflation, for a rate hike to materialise.

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