The Indian economy’s September quarter growth of 7.6% is undoubtedly a pleasant surprise, as few had anticipated such a good show. It also comes in the backdrop of a broadbased pick-up across most non-agricultural sectors, and there is no doubt that the full year GDP numbers have got a big fillip after the latest figures. Capital expenditure, as seen in the gross fixed capital formation (GFCF) number, demonstrated good growth at 11% year-on-year. The GFCF, as a share of the GDP, rose to 35.3% compared with 34.2% in the base quarter. One of the sectors that have done very well is construction, with a 13.3% y-o-y growth. This seems to be the result of a booming real estate sector and activity in industry. Given how the space offers employment opportunities for low-skilled workers, this is great news.
The headline numbers, however, mask some pain points on the expenditure side. The most worrying of these is poor private spending as reflected in the Personal Final Consumption Expenditure (PFCE), which grew at an anaemic 3.1% y-o-y, half the pace seen in Q1FY24. The PFCE accounts for close to 57% of the economy and the weakness in consumption, part of it attributed to a moribund rural economy, is disappointing. It is spending by the government—up a sharp 12.4% y-o-y—that has held up the economy.
The Q2FY24 performance has been bolstered by a sharp jump in the manufacturing sector, which grew at 13.9% y-o-y. While the growth is way above the average registered in the last eight quarters, it comes off an anaemic base of a negative 3.8% in Q2FY23. Also, whether the momentum in manufacturing will sustain is hard to tell because a fair bit has come from continued deflation in commodity prices, the effects of which will start to fade away. Some segments of the services sector haven’t done well. The trade, hotels, transport, communications segment, for instance, has grown at a very disappointing 4.3% y-o-y.
Economists attribute the muted performance to a tapering of pent up demand post the pandemic, worrying because the space employs large numbers of people. The very subdued growth in the agriculture sector is also worrying because of erratic monsoon, the not-so-full reservoirs and the worries over rabi crop sowing The rural economy is already running below potential—rural wages have been stagnant and could be further impacted. Corporate commentary for the September quarter had highlighted tepid demand for consumer goods in the hinterland with few signs of a revival. While the chief economic advisor said on Thursday rural consumers are doing better than urban consumers and that rural demand is steady, some of the high frequency data—tractor sales, for instance—don’t bear this out.
The economy is tipped to slow in the second half of the year for various reasons—a normalising base, weak rural demand, lower government capex, lagged impact of high rates, weak exports, muted private capex and the waning impact of commodity price fall. Ideally, the economy should be driven more by the services and exports sectors since these create many more jobs. Right now, however, the Reserve Bank of India (RBI) has good reason to continue to leave policy rates unchanged and withdraw liquidity when it can.