The Diwali month ended with a dhamaka as India’s GDP data for the July-September quarter surpassed the market expectation ceiling and recorded growth of 7.6 per cent YoY.
– By Rumki Majumdar
The Diwali month ended with a dhamaka as India’s GDP data for the July-September quarter surpassed the market expectation ceiling and recorded growth of 7.6 per cent YoY. The market’s average growth expectation was around 7 per cent in Q2 FY2023-24. Had it not been for the optimistic hint from the RBI Governor regarding the growth data, market expectations would have been more subdued.
The biggest boost to the second quarter growth came from the rebound in the industry sector (13.2 per cent YoY). High-frequency indicators for the industry sector such as the rebound in auto sales, index of industrial production (IIP) manufacturing numbers, and strong corporate profits in sectors such as capital goods, cement, and electronics did point to the resilient performance of the sector.
The double-digit growth in the industry sector led by manufacturing (13.9 per cent YoY) and construction (13.3 per cent YoY) suggests that businesses ramped up production to meet the oncoming festive demand. Investment data also pointed to gaining private capex spending—probably government capex is now crowding in private spending in households and corporates.
We expected service sector growth to hold up as a few high-frequency numbers such as credit growth and flights taken pointed to buoyancy in the sector. The financial, professional, and real estate services did quite well and grew 9 per cent in H1 FY24.
On the demand side, investment and government consumption boosted growth. Part of the 12.4 per cent YoY growth in government consumption could be attributed to the base effect as spending had contracted by 4.1 per cent YoY in Q2FY23. The frontloading of Government capex (54.7 per cent of BE in the first seven months) also remains a big contributor. We expect this to remain high in the months ahead. Export growth performed well (4.3 per cent YoY) after contracting in the previous quarter (-7.7 per cent). The uptick in services exports reflects the resilience and improved growth outlook of the US.
However, the data highlighted a few concerns regarding low consumption and weak agricultural performance. Personal consumption growth lost momentum, growing only 3.1 per cent YoY. We had anticipated this poor performance, as was reflected in the lower-than-expected volume growth of FMCG companies and the underperformance of consumer durables. While rural demand remained muted in Q2, weighing on overall consumer demand, demand among the affluent remained strong. The difference between GDP and GVA, attributed to the healthy growth in net taxes (11.2 per cent YoY), points to a possibly higher urban income. High-frequency data, such as higher-end passenger vehicle sales and flight tickets, also indicates strong growth among the affluent. We believe the low growth this quarter could be a reflection of consumers postponing their spending for the upcoming festive months.
While modest agriculture performance (1.2 per cent YoY) was expected due to the impact of temporal rains on Kharif crop production, this is the lowest growth since 2019. Poor growth in agriculture does not bode well with rural demand, which has been a drag on growth.
Factoring the underlying strength of GDP growth to be strong in the next two quarters, we may see FY 23-24 GDP growth to exceed 7 per cent.
This would need some stimulus from the government to support the rural demand, which is yet to recover sustainably. We expect the government to reduce subsidies and divert the savings from subsidies towards spending that can aid in sustainable growth in the long-term income amongst rural households. One of the ways could be higher spending on building rural infrastructure or providing incentives that improve cash flow. With the fiscal deficit for the first seven months reaching 45 per cent of the budget estimate, the Government has ample room to persist in prioritising infrastructure spending and providing support for jobs and income.
The other expectation is to bring more manufacturing opportunities to India. We recommend incentives such as broadening the scope of PLI schemes to sectors such as chemicals and services that can create demand for more manufacturing. The government’s incentives to attract private investment in manufacturing will create more opportunities.
Finally, we expect increased digital adoption across all sectors of the economy through suitable interventions focusing on educating stakeholders, improving tech affordability and accessibility, and boosting investments in R&D, etc. The role of AI and IoT will go a long way in improving productivity as well as creating more opportunities. All eyes are on the budget to see how support is provided to the lagging sectors of the economy and to ensure broad-based growth.
(Rumki Majumdar is the Economist at Deloitte India.)
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Source:financialexpress.com