India’s GDP growth has continued to show momentum recording a growth of 7.8 per cent in Q1 FY24, improving from the 6.1 per cent growth recorded in the previous quarter. While the GDP growth number is broadly in line with our expectations, it is lower than RBI’s projection of 8 per cent. A sector-wise analysis shows that the GDP growth has been led by the services sector that has recorded a strong growth of 10.3 per cent, with very good performance specifically by financial, real estate and professional services. With raw material prices reducing, the manufacturing sector has continued to show improved momentum recording a growth of 4.7 per cent.

On the expenditure basis, the heartening aspect is that the consumption momentum has shown an improvement, with private final consumption expenditure recording a growth of 4.9 per cent in nominal terms, compared to 2.7 per cent in the previous quarter. There has been some moderation in investment expenditure that has grown by 8 per cent in Q1 FY24 (8.9 per cent in previous quarter) and that can be partially attributed to the base effect. The capital expenditure is so far being mainly led by the government sector. In the April-June quarter we have seen the Centre capex increasing by 59 per cent (YoY), while State capex has grown by 76 per cent (as per our aggregate analysis for 19 States).

External demand weak

Weak external demand has continued to cast a shadow on India’s GDP numbers. While exports of goods and services have fallen in Q1 FY24, surprisingly imports of goods and services have increased. This has resulted in sharp widening of the trade deficit and has eaten into the GDP number. The sharp widening of trade deficit comes as a surprise as this is not completely in line with the monthly merchandise trade data.

Going forward, we expect the GDP growth to moderate in subsequent quarters. For FY24, GDP growth is likely to be around 6.5 per cent. There is likely to be some moderation in services sector growth as some of the pent-up demand wanes. The manufacturing sector is expected to see continued gradual improvement as the sector reaps benefits of lower raw material prices. The agriculture sector fate remains uncertain given the skewed progress of monsoon so far. In fact, the 8 per cent deficient rainfall so far and the skewed temporal and spatial distribution has already resulted in sowing of some of the kharif crops like pulses and oilseeds being adversely impacted.

Unfortunately, this comes at a time when some of global agriculture commodity prices (specifically edible oil) are also showing an increasing trend. The concerning aspect is that poor agri performance will also dent rural demand that had just about started showing signs of improvement. Moreover, this could also put upward pressure on food inflation. While the recent sharp spike in food inflation was mainly because of vegetable price inflation, inflation in some of the other food items like cereals, pulses and milk has already been high. The threat is that sustained high food inflation could dent the overall consumption recovery, specifically for the lower income category. With global GDP growth continuing to remain weak, external sector demand is likely to remain weak in the coming quarters. That makes it even more critical for domestic consumption demand to continue the momentum.

The other critical aspect would be for private investment to pick up in the months to come. As per CMIE data, investment projects completed is so far clearly being led by the government sector. Moreover, it is limited to the construction and road sector, with the manufacturing sector still looking weak. However, the private sector has been showing strong intent to invest, as per the Investment Projects announced data. Hopefully this should result in private investment picking up in the coming quarters.

The writer is Chief Economist, CareEdge Ratings

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