INDIA’S REAL Gross Domestic Product (GDP) growth rose to a four-quarter high of 7.8 per cent in April-June, mainly due to a pickup in agriculture and services especially financial, real estate and professional services and contact-intensive services of trade, hotel and transportation, data released by the National Statistical Office on Thursday showed. Manufacturing and construction sectors, however, recorded slower-than-expected growth rates.
Capital formation, a proxy for investments, and private consumption expenditure, an indicator of consumption demand, posted growth rates of 8 per cent and 6 per cent in Q1 FY24, respectively. These had recorded higher growth rates of 20.4 per cent and 19.8 per cent, respectively, in the corresponding period a year ago. As a share of GDP, private consumption expenditure dropped to 57.3 per cent of GDP in April-June from 58.3 per cent in the year-ago period.
Surprisingly, there was a contraction of 0.7 per cent in government expenditure in the first quarter this year — its share in GDP also decreased to 10.1 per cent of GDP from 11 per cent; exports also recorded a contraction of 7.7 per cent, while imports increased by 10 per cent.
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Economists pointed out that the manufacturing sector’s growth is skewed more towards organised sector’s growth, a trend reflective of the ongoing recovery still not being broad-based enough. Going ahead, consumption demand may also get affected amid inflationary pressures and weak external demand, they said.
Chief Economic Adviser (CEA) V Anantha Nageswaran said India’s quarterly GDP growth is way higher than the GDP print of many other economies and that the government and the Reserve Bank of India (RBI) are comfortable in holding on to their FY24 GDP growth forecast of 6.5 per cent. He said the services sector has been the main driver of growth along with an uptick in capital formation. He said the government’s capital expenditure push is “paying off” and is crowding in private investment.
EXPLAINED
The monsoon factor
Going ahead, the government is concerned if it can sustain the growth momentum, given the lower than expected rain which may not just impact incomes, but also keep prices high and affect consumption demand in coming months.
“When I spoke to you at the end of May, I did say that compared to what we said in January in the Economic Survey, wherein we said that the downside risk factors were higher than the upside surprises to the 6.5 per cent forecast – the risks are now evenly balanced around our central expectation of 6.5 per cent. We maintain that view,” he said.
The RBI had projected a first quarter growth rate of 8 per cent, coming on the back of a 6.1 per cent growth in January-March and a 13.1 per cent growth in April-June 2022. “Real GDP growth for 2023-24 is projected at 6.5 per cent with Q1 at 8 per cent; Q2 at 6.5 per cent; Q3 at 6.0 per cent; and Q4 at 5.7 per cent,” RBI governor Shaktikanta Das had said earlier this month.
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According to the latest data, five of the eight key sectors registered over 5 per cent growth in April-June, with two sectors recording a higher growth rate than the year-ago period — ‘financial, real estate and professional services’ at 12.2 per cent as against 8.5 per cent in the year-ago period, and ‘agriculture, forestry and fishing’ at 3.5 per cent as against 2.4 per cent.
Manufacturing grew at 4.7 per cent in April-June 2023 as against 6.1 per cent in April-June 2022, while mining and quarrying grew at 5.8 per cent, lower than 9.5 per cent a year ago. Construction sector grew at 7.9 per cent in April-June this year as against 16 per cent growth in the corresponding period last year.
Economists pointed out that the manufacturing sector’s growth is skewed more towards organised sector’s growth. “Manufacturing growth at 4.7% should be viewed more from the point of view of lower performance of the unorganised sector as profit growth and hence value addition has been high for the corporate sector which gets included here. The push is provided by the services sector where both trade, transport etc. and finance and real estate have grown by 9.2% and 12.2% in high base growth rates. The relentless uptick in PMIs gets reflected here where pent up demand has kept the mood up. This will tend to taper down in the coming quarters,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.
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A broad-based recovery in private consumption is some distance away, India Ratings said. “The current consumption demand is skewed towards goods and services consumed largely by the households falling in the higher income bracket,” Sunil Kumar Sinha, Senior Director & Principal Economist, India Ratings said.
Going ahead, erratic monsoon and inflationary pressures could affect consumption demand, economists said. “The road ahead is not going to be easy so long as PFCE does not recover fully and become broad based. Also, the impact of El Nino on this year’s monsoon could bring agricultural growth under pressure and the spillover effect of this would be felt on food inflation. A government intervention in agriculture and drought relief measures could pressure and destabilise the fiscal arithmetic of FY24. Amidst these challenges, however, revival of private corporate capex is expected to bring relief to the economy,” Sinha said.
The GDP print could also have fiscal implications as the government’s budget metrics are linked to nominal GDP growth, which has come in just 0.2 percentage points higher than the real GDP at 8 per cent. Nominal GDP accounts for the inflation rate and the deflator for GDP is linked to the wholesale price index-based inflation, which has been in the negative territory for the last four months.
DK Srivastava, Chief Policy Advisor, EY India, said, “The proximity of real GDP growth at 7.8% with nominal GDP growth at only 8% has significant fiscal implications. These growth rates imply that the implicit price deflator (IPD) based inflation is only 0.2%. Such a low IPD inflation is seen after 15 quarters. With a low nominal GDP growth, tax revenue growth is expected to be muted. As per the CGA data, the buoyancy of Centre’s gross tax revenues (GTR) is only 0.4 in the first quarter. If low nominal GDP growth is combined with a significantly low buoyancy, the resultant tax revenue growth is expected to be considerably low.”