Private final consumption expenditure (PFCE) showed an encouraging 6% growth in the first quarter of the current fiscal after a subdued performance in the third and fourth quarters of the previous financial year.
However, a broad-based recovery in PFCE will take some time as inflation has come in the way of demand, economists said. The PFCE growth had slowed from 19.8% in Q1FY23 to 8.3% in Q2, 2.2% in Q3 and 2.8% in Q4 of the previous fiscal.
The government final consumption expenditure (GFCE) has declined 0.7% in the April-June quarter of the current fiscal, compared with a 2.3% growth in Q4 of the previous fiscal. While the Centre pushed capex in Q1FY24, which grew by 59%, its revenue expenditure declined marginally year-on-year.
Led by government investment, the gross fixed capital formation (GFCF) grew at a robust pace of 8% in Q1FY24, though it is a deceleration from 8.9% in Q4FY23. The GFCF-to-GDP ratio rose to 29.3% in Q1FY24 from 29.1% in the year-ago quarter.
In real terms, consumption and government spending shares have fallen while capital formation has remained unchanged. Exports of goods and services recorded a contraction.
“Yet, India Ratings believes a broad-based recovery in PFCE is some distance away. The current consumption demand is skewed towards goods and services consumed largely by households falling in the higher income bracket,” the rating agency’s economists Sunil K Sinha and Paras Jasrai said.
The fall in the share of consumption in real terms can be attributed to high cumulative inflation that has come in the way of demand, Bank of Baroda chief economist Madan Sabnavis said. “This will work even in the coming months, and hence is a risk factor.”
Despite global headwinds, the GDP growth momentum witnessed in Q1FY24 at 7.8% is indicative of the economy’s resilience. “However, the road ahead is not going to be easy so long as PFCE does not recover fully and become broad-based,” Sinha and Jasrai said.
Chief economic adviser V Anantha Nageswaran said investment and consumer momentum will underpin solid growth prospects over the upcoming year.
India Ratings believes that in the absence of private corporate sector capex, government investment is providing the necessary support to the ongoing recovery. However, early signs of a revival of private corporate sector capex are becoming visible, the rating agency said.
“The pickup in private corporate capex augurs well for the gross fixed capital formation in the Indian economy,” Sinha and Jasrai said.