At 7.8% year-on-year (y-o-y) and 8.2%, the headline GDP growth numbers for Q4FY24 and FY24 respectively are stunning. However, as experts have pointed out, there seem to be deflator issues at play that are artificially pushing up the real GDP growth numbers. An important factor that seems to have driven up GDP growth in Q4 has been the high growth in net taxes of over 20% — a combination of higher tax collections and a lower subsidy outflow. Indeed, the difference between the GDP and gross value added (GVA) is wide at 1.5% in Q4 while for the full year it is 1%.
As such, it would be probably more relevant to look at the GVA numbers. At 6.3% y-o-y for Q4 and 7.2% for FY24, they suggest the economy is growing at a slower pace. To be sure, the growth reflecting in the GVA numbers is also reasonably good but there are some pressure points. The biggest one is the private final consumption expenditure (PFCE) which accounts for nearly 56% of the economy. This has grown at just 4% for FY24, the slowest levels seen in at least 12 years. In fact, in Q4FY24, the PFCE grew by 4% y-o-y on a very weak base of just 1.5% y-o-y in the base quarter. It was the same story in Q3 and suggests a deteriorating trend. The weak consumption is a cause for concern because in the absence of visibility on demand, industry would be reluctant to invest, which in turn would hurt employment opportunities.
The performance of the farm sector in FY24, where at 1.7% the growth is the slowest in the last seven years, is also worrying. The distress in the rural economy has persisted for more than three years now with real wages having stagnated or contracted for some periods. The growth rates in Q4 and Q3 — at 0.6% y-o-y and 0.4% y-o-y respectively — are the weakest in five years and are probably the result of a not-so-good 2023 monsoon. Unless the performance of the agri sector improves, the recovery in the economy could remain skewed. Within services, construction fared well but not trade, hotels, and transport, which clocked in just 6.4%, the lowest growth in 12 years.
The good news is that the manufacturing sector has put up a very good show in FY24, growing at nearly 10%. Some of this can be attributed to cheaper inputs. The drag from the external sector lessened with net exports turning positive in Q4 after staying negative for three quarters. The gross fixed capital formation (GFCF) increased 9% for the year. The concern here is that the private sector’s contribution to investments remains relatively small with the government doing the heavy lifting. The weak consumption and farm sector performance should be reason enough for the Reserve Bank of India to consider easing rates as soon as possible to bring some relief to smaller business units. The central bank should take a cue from the moderation in momentum in Q4 in industry and services. The 5.1% y-o-y growth in the trade and hotels segment is worrying because job opportunities could fall. In fact, GFCF grew only 6.5% y-o-y, the slowest in four quarters and off a very low base of 3.8% y-o-y. With rural consumption already subdued, urban consumption should not be hit.
Views are personal