India’s real GDP growth raced to a 4-quarter high in Q1 FY24, in line with market expectations, coming in at 7.8%YoY compared to 6.1% in Q4 FY23 (Refinitiv: 7.7%). Growth in GVA matched that of GDP in the quarter, clocking an improvement from 6.5% in previous quarter. Interestingly, nominal GDP had a muted growth of 8.02% which is the lowest print in the last ten quarters due to benign inflation readings both in CPI and in WPI where, in particular, a deflation happened after twelve quarters.

Key highlights

• Sequentially, GDP contracted by 7.4%QoQ, much higher than the pre-pandemic average (over a 5-year period) of -3.2% observed in Q1. This underscores the support from a favourable base to headline GDP growth, as Q1 production over the last three years had been marred by Covid effects albeit with reducing intensity.

• On annualised basis, growth was broad-based with 5 of the 8 sectors recording an acceleration vis-à-vis Q4 FY23. Improvement in growth was predominantly led by sectors of – 1) Finance, Real Estate & Professional Services, 2) Public Administration, Defence & Other Services, 3) and Mining & Quarrying sectors, along with marginal uptick seen in Manufacturing and Trade, Transport, Communication & Hospitality Services.
  

• While growth in agriculture and construction moderated in comparison to previous quarter, the former was in line with LPA (at 3.5% in Q1 FY24) and latter still clocked a healthy expansion of 7.9%. Only electricity sector displayed exceptional weakness, with growth slipping to 2.9% - the lowest since Jun-21 and this we believe is largely on account of a warmer summer and higher residential demand in the previous year.
  

• On the demand side of GDP, growth was single-handedly driven by private consumption expanding by 6.0% in Q1FY24 compared to 2.8% in Q4 FY23. While investment growth moderated marginally to 8.0% from 8.9% in previous quarter, it continued to remain healthy and provided support to the GDP figure. In fact, on trend basis, 4 quarter moving average of investment growth has been exceptionally stable at 8.6%, predominantly supported by Government capex..

• Growth in government consumption and exports both slipped into contraction in Q1 FY24. Expectedly, subdued growth in Government’s revex (i.e., revenue expenditure sans interest and subsidy payments) and near stagnant global trade activity (see chart) explain such a trend.
  

• Ratio of external trade deficit to GDP widened substantially to 6.4% in Q1 FY24 from a mild 0.1% in Q4 FY23, on account of higher merchandise trade deficit during the quarter.

• Nominal GDP growth at 8.0% in Q1 FY24, reflects marked deceleration in input costs in the quarter, especially WPI inflation which slipped into a contraction.

Outlook

The healthy pace of GDP growth continuing well into Q1 FY24 was in line with performance of several high frequency indicators, such as GST collections, auto sales, PMI data among others. Services as a sector continues to outperform, with healthy traction in Trade, Transport, Communication & Hospitality Services driven by recovery in contact-intensive sectors. Overall, strength in domestic consumption outweighed the drag from global demand in Q1 FY24.

Q1 FY24 is also likely to be the peak of quarterly GDP trajectory for FY24. Further ahead into the fiscal year, growth outcomes are expected to moderate amidst kicking-in of an unfavourable statistical base along with pace of incremental economic activity moderating on both exports and domestic consumption fronts. While we continue to expect the underlying strength in investment theme to prevail in FY24, slowdown in global growth, waning of domestic pent-up demand and lagged impact of monetary tightening are expected to collectively weigh more materially going forward. In addition, adverse impact of El Nino on monsoon performance if lingers into Sep-23, may impinge not only on Kharif output but also hamper Rabi prospects.

As such, we maintain our call of moderation in FY24 GDP growth to 6.0% from 7.2% in FY23.

Concludes Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research Ltd “As expected, GDP growth in the first quarter of the current fiscal was robust buoyed by the strong momentum in the services sector and partly by the favourable base. Contact intensive services and construction have stood out among the key growth segments. What is encouraging is the healthy annualized growth in private consumption by 6.0% YoY compared to a weak 2.8% and 2.2% in the previous two quarters which indicates a revival in rural demand. The rise in gross fixed capital formation continues to be steady at 8.0% YoY. Expectedly, the decline in exports has been a constraining factor which is likely to impact growth in the subsequent quarters as well.

Going ahead, we expect growth to moderate in the subsequent quarters with the full year growth pegged at 6.0%. The downside risks to agriculture in the current year have increased which may slow down the growth in rural demand. A sustained growth in private sector investments may partly offset such risks but such trends need to be watched further.” 

Table 1: India’s GVA and GDP: Sectoral break-up

Chart 1: Slowdown in global trade is beginning to impinge on India’s growth