India’s gross domestic product (GDP) beat all estimates by a wide margin to grow at 7.6% in real terms in the September quarter (Q2FY24), with a big – and unexpectedly solid – push from manufacturing and investment segments that have been weak spots in the country’s economic landscape for long.
Manufacturing grew an encouraging 13.9% in Q2FY24, though on a weak base (-1.4%), thanks to a sharp sequential pick-up from 4.7% in the June quarter.
The headline GDP number, way higher than the Reserve Bank of India (RBI) projection of 6.5% — even the most optimistic forecasts hovered around 7% —got backing from government consumption spending (up 12.4% on shrunken base), while private consumption, the largest part of the GDP, was muted (3.1%).
There will, however, be a slowing of growth in the second half for cyclical and statistical reasons; the government stuck to the growth forecast of 6.5% for the current financial year.
Chief economic adviser India Chief Economic Adviser V. Anantha Nageswaran, however, said strong tax collection – with buoyancy of nearly 2– “the economy might be doing better than the current official estimates suggested. “We might be understating India’s growth rather than overstating it,” he said, adding that high-frequency indicators signalled “a good start to Q3.” India’s growth prospects, he said, appeared bright though external factors posed a downside risk.
Key services industries, which, along with government spending, held the fort over many post-pandemic quarters, turned weaker in the September quarter. Mining and construction sectors, both large employment providers, remained robust in the September quarter, with year-on-year growth rates of 10% and 13.3% respectively.
Agriculture and allied sectors grew at relatively low rate of 1.2% in Q2FY24, compared with an average rate of 4.6% in the previous three quarters, as temporal rains hit the khariff crop.
The data put out by the National Statistical Office on Thursday also bore signs of the much-desired investment cycle starting. A 11% year-on-year jump in gross fixed capital formation (GFCF) must have been to a large extent due to public capital expenditure – Centre’s budgetary capex grew 43% on year in the first half of the current fiscal –, but would not have been possible without a spurt in private investments in many industries.
“The private sector is poised to attain stronger investment growth, following the strengthening of corporate and bank balance sheets, and supported by the government’s capex push,” Nageswaran said.
Signs of a shift from consumption-based to investment-led growth are also visible in the rise in GFCF’s share in the GDP from 34.7% in June quarter to 35.3% in September quarter. Private final consumption expenditure (PFCE), however, slipped from 59.3% of GDP in the March quarter (Q4FY23) to 57.3% in Q1FY24 to 56.8% in Q2FY24.
PFCE in Q2FY24 was 18% higher than the corresponding quarter in the pre-pandemic year of FY20, while GFCF, consistently supported by public investments, grew at almost double that pace in the period.
The growth in gross value added (GVA) the September quarter was at 7.4%, lower than 7.8% in Q1FY24. The growth of net taxes (net of indirect taxes over subsidies) was 10.2% in Q2, much higher than 7.7% recorded in Q1.
The muted private consumption in Q2FY24 is seen to be due to a sharp fall in rural consumption in the backdrop of uneven monsoon and high inflationary pressures.
Net exports – the excess of exports over imports –dragged down the GDP growth in Q2FY24 by 3.6 percentage points, but not as much in the previous quarter (4.6 pps).
Thanks to wholesale price price deflation in the whole of September quarter, and an easing of retail inflation, nominal GDP expansion in Q2FY24 came in at 9.12%, as against 8% in the previous quarter. This means that, to reach the Budgeted growth of 10.8% in FY24, GDP in nominal terms will have to expand by 12.8% in the second half, which seems highly unlikely.
Economists now peg nominal GDP growth for the whole of FY24 at around 9%, as against 10.77%. This could increase the ratio of the Centre of fiscal deficit to GDP by 10 bps, assuming other budget numbers hold.
The fiscal deficit target for the current fiscal is 5.9%, and as per the data released separately by the Controller General of Accounts on Thursday, in April-October period, the deficit stood at a benign 45.6% of the annual target.
Government sources are still confident of meeting the fiscal deficit target, given the robust tax (up 11% in April-October) and non-tax (49%) revenues. While the Centre’s budget capex grew 34% in April-October, but the latest CGA data revealed a slowing of overall budget spending in October (-14% on year).
Rajani Sinha, chief economist, CareEdge said, “going ahead, private consumption could accelerate owing to further improvement in urban demand led by festive boost in Q3. However, the outlook for rural demand revival remains clouded amid monsoon deficiency and likely hit to the agricultural production.”
“We expect GDP growth to slow in 2HFY24,” Madhavi Arora, lead economist, Emkay Global said, citing cyclical headwinds in the form of relatively slower government spending, “fading benefits of lower commodity prices and sub-par agriculture performance, tighter lending standards and weaker exports.” “Besides, the deflator related growth boost seen in the first half of FY24 are likely to increasingly unwind,” she noted.
“From the expenditure side, discrepancies remain the main driver in contribution terms for the second consecutive quarter. In Q2FY24 it contributed 4.6 pps to overall GDP growth (or 60% of overall growth),” wrote Gaura Sen Gupta, economist at IDFC First Bank.
“Although agricultural GVA grew by 2.4% in H1FY24, it is expected to clock a growth of about 3% for the year as a whole, wrote DK Srivastava, chief policy adviser at EY India.
The growth in services sector eased to 5.8% in Q2FY24 from 10.3% in Q1FY24. This was due to across-the-board decline in growth of all the three sub-sectors within services. The growth in ‘trade, hotels, transport, communication & services related to broadcasting’ declined to 4.3% from 9.2% in Q1, and that of ‘financial, real estate & professional services’ eased to 6% from 12.2%. ‘Public administration, defence & other services’ growth decreased to 7.6% from 7.9%.