At 7.3%, the first advance estimate for real GDP growth in the current year is a stunner, coming in above 7.2% in FY23. It is evident that some parts of the economy, such as manufacturing and construction, are doing very well even though the momentum in the services space as a whole has been forecast to decelerate sharply. The government’s GDP forecast for FY24 is essentially based on the April-November data available to it. Encouragingly, gross fixed capital formation is tipped to grow at a strong 10.3% this year. At the same time, it would be instructive to look beyond the headline number because there are some big pain points.
The most important of these is the private final consumption expenditure (PFCE), where growth is forecast to moderate sharply to 4.4% in FY24 on the back of a not-so-high 7.5% in the previous year. This is worrying because consumption accounts for close to 57% of the economy. The commentary from companies, over the past year or so, has indicated that rural demand remains sluggish and there are few signs of it recovering meaningfully.
Of late, concerns have emerged that consumer demand in urban India, too, isn’t as robust either. The fact is that the job market isn’t as strong as one would have liked, even if hiring in certain sectors is on the rise. Further, experts worry that leveraged consumption levels, which may have been driving spending, could taper off, following the tighter rules imposed. As economist Pronab Sen has pointed out, a situation in which private consumption is growing at 300 basis points below the rate at which the economy is printing while the capital formation is clocking in a much faster pace appears to be unsustainable. Indeed, it would be not surprising if beyond a point industry gets wary of adding capacity because visibility on consumption is poor. In the last seven years, PFCE has not crossed 7.6% except in the post-Covid year of FY22.
Again, one could argue that the very sharp deceleration in the trade, hotels, transport and communication segment, estimated to grow at 6.3%, comes on the back of a high base; the growth in FY23 was a strong 14%. However, this is a sector that has huge employment potential and such a steep moderation is worrying, especially at a time when sluggish exports are already hurting the jobs market. It is possible this segment of the economy has also been affected by smaller consumer discretionary spends.
The rural distress is reflected in the performance of the agriculture sector, which is poised to grow by only 1.8% this year. Given that the kharif output has been modest and that the government’s capex might well slow down, ahead of the elections, the economy is likely to grow more slowly than the estimated 6.95% in H2. In fact, the Centre’s capex was lower by nearly 9% y-o-y in October-November, having increased by 43.1% in H1FY24. The estimated GVA growth of 6.9% for FY24 is much lower than the estimated GDP growth. The muted wholesale inflation has seen the nominal GDP growth projection fall to 8.9% for the current year, way below the 16.1% in FY23. While this may imply a slightly higher fiscal deficit of about 6%, the buoyant revenues will help the government address this. The focus should be on reviving consumption.