India’s Q1 GDP growth below estimates at 6.7%
India's economy grew 6.7% in Q1 2024, slower than the 7.8% in Q4 2023. Strong investments and private consumption show resilience despite slower growth.
The Indian economy grew at a slower-than-anticipated 6.7% in the quarter ending June 2024 compared to a stellar 7.8% growth in March 2024, the slowest rate of expansion in five quarters, although strong investment growth, a sharp recovery in private consumption, and steady GVA growth point to underlying resilience of the economy.
The latest GDP growth numbers -- they were released by the National Statistics Office (NSO) on Friday -- are 40 basis points lower than what MPC forecast in its August meeting and ten basis points lower than the 6.8% projection by a Bloomberg poll of economists. One basis point is one hundredth of a percentage point.
The latest GDP print suggests a significant loss of momentum in the Indian economy and could now soften the hawkish tone of a divided monetary policy committee (MPC) of the Reserve Bank of India (RBI). GDP growth in the quarters ending December 2023 and March 2024 was 8.6% and 7.8% respectively and the trend could give strength to what is, so far, a minority opinion within MPC that the prolonged monetary tightening has perhaps generated larger than anticipated headwinds for growth. RBI has not changed policy rates since February 2023 and continues to keep its monetary policy stance at withdrawal of accommodation.
“The majority of the MPC is, in my view, too sanguine about growth in ensuing quarters. Data from various RBI surveys show multiple early warning signals that growth may be already slowing down. Expectations of robust growth depend heavily on an expectation that private capital investment will pick up soon. However, we have been hoping for this revival for many quarters now, and hope is not a strategy”, the minutes of August MPC meeting recorded Prof Jayanth R Varma’s critical assessment about the current growth momentum. Varma is one the members who has been asking for a reduction in policy rates in MPC.
MPC has projected a 7.2% GDP growth for 2024-25 with the September 2024, December 2024 and March 2025 quarter numbers being 7.2%, 7.3% and 7.2% respectively.
Chief Economic Adviser (CEA) V Anantha Nageswaran said he was certain about continued strong growth momentum between 6.5% and 7% in the current financial year.
“First quarter slowdown was anticipated due to the election and [consequently] due to the slowdown in government spending,” he said, commenting on the latest GDP numbers in an interaction with reporters.
He said all components of demand side, except for the government final consumption expenditure (GFCE) registered healthy growth and the positive growth momentum is likely to continue.
“In the medium term, therefore, the Indian economy can look forward to growth rate of 6.5-7% and opportunistically 7%-plus, if we can build on the structural reforms undertaken over the last decade. But, on the baseline level, 6.5% to 7% growth rate is very realistic. The 7%-plus growth rate can be achieved if structural reforms undertaken over last decade are further expanded in the coming years as well,” he said.
The CEA said the Budget 2025 gives continued boost to the growth momentum through its focus on priority areas such as agriculture, employment and skilling, inclusive human resource development and social justice, manufacturing and services, urban development, energy security, infrastructure, innovation, research and development, and next generation reforms.
He, however, cautioned about possible risk factors. “Potential corrections in financial markets will impact household finances and corporate valuation,” he said.
Election outcomes across the world and their implications for global trade and investment is another.
The GVA data – the December 2023, March 2024 and June 2024 prints are 6.8%, 6.3% and 6.8% respectively – suggests that the actual economic momentum is largely unchanged and the previous spike in GDP growth was largely a result of the fiscal recalibration on part of the government.
GDP is the sum of GVA and net indirect taxes and it tends to go up when the government raises more taxes or cuts back on subsidies.
A sector-wise look at the GVA numbers, in fact, suggests a broad-based improvement in economic momentum with agriculture, industry and services showing higher or largely similar growth than in the March quarter. Agriculture and allied activities grew at 2% in the June quarter compared to 0.6% in March. Services growth increased from 6.7% to 7.2% between March and June 2024.
While industry has seen a marginal deceleration in economic momentum with the June quarter growth coming up at 8.3% compared to 8.4% in March 2024, this is likely a result of inflation indexation issues with the wholesale price index rising from 0.3% in March quarter to 2.4% in June. This seems to be the most plausible outcome given the fact that real growth in manufacturing (7.1%) has fallen below the nominal growth number in June 2024 (7.9%) unlike in the quarters ending December 2023 and March 2024. Construction growth has increased from 8.7% to 10.5% between March and June 2024.
Another encouraging statistic in the latest GDP numbers is a 7.5% growth in private final consumption expenditure (PFCE), the highest this number has been since the quarter ending September 2022, which reflected a favourable base effect because of the pandemic’s scars from 2021. Weak private consumption has been a major concern in India’s post pandemic recovery and if this number were to strengthen going forward, it would bring a lot of relief to policy makers and cheers for the market.
A sustained recovery in PFCE could also convince private capital to finally start the investment engine which has been stuttering despite healthy balance sheets in banks as well as the corporate sector.
Government final consumption expenditure (GFCE) contracted by 0.2% in the June quarter which is in keeping with the fiscal consolidation announced in the budget. Gross Fixed Capital Formation (GFCF), which measures investment spending in the economy, grew at 7.5% in the June quarter which is a percentage point higher than the March quarter number.
Shreya Sodhani, regional economist, Barclays, said that while today’s GDP growth printed much lower than what was expected, the forecast for annual GDP growth at 7% (FY23-24: 8.2%) remains.
“A revival in private consumption and investment is visible from today’s data. We expect annual growth to moderate following the blistering pace in the previous year, but turn more balanced, driven by a pickup in rural consumption from a favourable monsoon season, and gradual recovery in exports. Easing of monetary policy, anticipated from December, may provide some boost, though a large part of the policy transmission, and hence, impact on growth, will be visible only next year,” Sodhani said.