India’s Q2 FY24 GDP growth coming in at 7.6% YoY, posted a significant positive surprise, as it exceeded market consensus expectation of 6.8%, by a wide margin. Following the 7.8% YoY growth in Q1 FY24, the GDP growth in the first half of the year stood at a robust 7.7% YoY. 

Key highlights 

1. On demand side, the trend has been somewhat mixed. Government consumption and investments (gross fixed capital formation) accelerated to attain double digit annualized growth in Q2 FY24 at 12.3% YoY and 11.0% YoY respectively. Improvement was also seen in case of exports, which saw a shift from contraction in Q1 FY24 to expansion in Q2 FY24. In contrast, growth in private consumption underwhelmed at only 3.1% YoY compared to 6.0% in the previous quarter. Further, the growth in imports picked up to 16.7% YoY, resulting in a mild expansion of the net exports drag on GDP.
2. Government consumption expenditure is in line with the trend seen in case of its proxy high frequency indicators. However, acceleration in investments (which has been clearly dominated by public capex in the post Covid recovery phase) seems somewhat at odds with high frequency data. As per monthly government finances, the rate of capex disbursal while being healthy, decelerated sharply in Q2 FY24 to 32% YoY from 63% in Q1. Could a sharp pick-up in private capex be responsible for the residual strength in investments? While sentiment around private capex is gradually improving, we doubt it would have played such an outsized role in supporting acceleration in headline investments during Q2 FY24.  
3. On the supply side, there appears a sharp divergence between industrial and non-industrial drivers of growth. Industry GVA clocked 13.2% YoY in Q2 FY24, the highest in nine quarters. The underlying strength is broad-based as all the four sub-sectors (mining, manufacturing, utilities, and construction) saw double-digit annualized expansion. In contrast, Services GVA moderated to 5.8% YoY, its slowest in six quarters led by slowdown in case of contact intensive services as well as business & financial services. In addition, gross value added (GVA) in agriculture printed at an 18-quarter low at 1.2% YoY , reflecting the impact of unevenness in monsoon performance. 
4. There are possible three reasons behind the heightened performance of the 13.9% YoY GVA growth in the manufacturing sector despite the headwinds to exports – (i) robust performance of the steel and cement industry which reflects strong demand from the infrastructure sector (ii) lower inputs costs which have improved the profitability margins for most manufacturers and (iii) steady domestic consumption demand in some sectors such as auto. 
5. Nominal GDP growth increased to 9.1% YoY in Q2 FY24, up from 8.0% in Q1. Despite the improvement in Q2, nominal growth remains much below FY24 implied budgeted estimate of 10.8%. The difference is on account of ongoing deflation in WPI (H1 FY24 at -1.8% YoY vs. 14.2% in H1 FY23 and 5.0% in H2 FY23).

Outlook

Although India’s GDP growth has moderated from 9.5% YoY in H1 FY23 to 7.7% YoY in H1 FY24, the overall momentum has exceeded expectations with no major indications of an economic slowdown so far. As such, we revise up our forecast for FY24 GDP growth to 6.5% from 6.0% earlier. 

Having said so, the expectation of a sequential moderation in GDP growth in H2 FY24 (to be pronounced in Q4) remains unchanged. Going forward, economic activity momentum is likely to wane on account of:

1. Slowing external demand, with WTO slashing its 2023 global merchandise trade forecast to 0.8% from 1.7% earlier. In addition, lower guidance by IT companies does not bode well for the growth in services exports.
2. Leveraged consumption is likely to moderate from lagged impact of RBI’s monetary tightening, particularly the latest measure to moderate uncollateralised retail lending.
3. Govt capex giving up some momentum in H2 FY24 to meet the headline target for fiscal deficit (the front loading in H1 reflects an attempt to support private investment activity ahead of the busy election cycle). 
4. Downside to kharif output and concerns over El Niño in 2024 weighing on rabi prospects, could keep the primary sector somewhat under pressure. 
5. With WPI inflation expected to turn positive in H2 FY24, the statistical boost from price deflator (seen in H1 FY24) would reverse. This is likely to show up as lower value add by the non-financial corporate sector. 
6. The pent-up demand (a key driver of the post Covid recovery phase), as witnessed in case of contact-intensive services sector, is showing signs of normalization and declining base support. 

Overall, the Indian economy is likely to witness a mixed landscape with bright spots (public capex) and areas of concern (sustainability of consumption demand). As we shift our gaze from the rear-view mirror to the road ahead, a sense of cautious optimism seeps in as the India continues to outshine others despite prevailing global uncertainties.

Says Suman Chowdhury, Chief Economist and Head - Research, Acuité Ratings & Research “GDP growth for the second quarter of the fiscal has really surprised the markets  and has been primarily driven by the acceleration in the manufacturing sector. There are possible three reasons behind the heightened performance of the manufacturing sector despite the headwinds to exports – (i) robust performance of the steel and cement sector which reflects strong demand from the infrastructure sector (ii) lower inputs costs which have improved the profitability margins of the sector and (iii) steady domestic consumption demand in sectors such as auto. 

On the other hand, the data doesn’t look that good on the consumption side with PFCE growing by only 3.1% YoY. In our opinion, this is largely due to a weakness in rural demand and it is being reinforced by the low growth in the agricultural sector. Further, the growth in the various segments of services have also been moderate, reflecting a moderation of pent-up demand. However, this has been more than offset by the solid growth in government expenditure and investments. 

While the base factor will not be in action in the second half of the year and there are material risks of lower agricultural output and weaker rural consumption, we have revised our full year GDP growth forecast to 6.5%, given the exceptional growth print in Q2FY24 and the average 7.7% YoY growth in H1FY24. 

In the coming MPC meeting, we expect RBI to take note of the stronger growth momentum in the current year and the likelihood of a fresh buildup of inflationary pressures particularly if food inflation gets affected by the El Nino weather events. However, a sustained pause is the most likely scenario although the system liquidity may be kept relatively tight. Any rate cut decision appears unlikely over the next 6 months.” 

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

Chart 1: India has surpassed its major DM/EM peers in terms of GDP growth

Note: We have adhered to DM/EM classification for countries as per the IMF

Chart 2: Pace of Consolidated Capex set to come down

Note: 1 and 10 states are yet to declare their finances for Sep-23 and Oct-23 respectively. We have extrapolated data in case of unavailability.