India’s GDP growth moderated to 7.8% YoY in Q4 FY24 from 8.6% (revised up by 20 bps) in Q3. Despite the moderation, the headline activity data brings cheer as the print was significantly higher than market consensus expectation of 6.7-7.0%. In contrast, the upside surprise in Q4 FY24 GVA growth is relatively sedate and rather in line with expectations (6.3% YoY vs. market consensus expectation of 6.2-6.5%). 

Basis available information for all the four quarters, the GDP growth estimate for FY24 saw an upward revision to 8.2% compared to NSO’s second advance estimate of 7.6%. On a similar note, the GVA growth estimate for FY24 saw an upward revision to 7.2% compared to NSO’s second advance estimate of 6.9%.

It is noteworthy that the divergence between GDP and GVA growth continued to remain elevated at ~150 bps in Q4 FY24 compared to the 20-year median spread of ~30 bps. Higher than anticipated net indirect taxes in FY24 have amplified the GDP growth momentum.

Given the unusually wide divergence between GVA and GDP data, we believe one should focus on the supply side activity captured by the GVA data as it is a better representation of the underlying growth momentum. Having said so, key individual items within the demand/ expenditure side of GDP also provides a good assessment.

`Key highlights of Q3 data

• From GVA perspective, the growth momentum is showing moderation – Q4 print of 6.3% is the lowest amongst the four quarters in FY24.
  1. Agriculture and allied sectors  once again saw a tepid performance, with annualized value-added growth of just 0.6% in Q4 and 1.4% overall in FY24. This reflects the impact of adverse weather conditions on account of El Nino.
     
  2. Growth   industrial value-add slightly moderated to 8.4% YoY after remaining in double digits for two consecutive quarters. The moderation was broad-based across all sub-sectors, amidst waning of deflationary pressures in industrial inputs.
     
  3. Services sector too saw a moderation, driven by lower value-add growth in Trade, transport & communication activities. This highlights a continuing normalisation in contact-intensive services and can also be seen as a proxy for moderation in urban consumption.
• Glancing through the demand side components of GDP, we note that
  1. Private consumption growth stayed weak, clocking a 4.0% annualized growth for two consecutive quarters. Notably, the share of private consumption in GDP fell to an 11-quarter low of 57.9% in Q4 FY24.
  2. Government consumption remained tepid (0.9% YoY) after contracting in the previous quarter. The monthly fiscal data indicates that the combined revex (revenue expenditure excluding interest payments) by central and state governments contracted by 0.3% YoY in Q4 FY24.
  3. Growth in fixed investments moderated to 6.5% YoY from 9.7% in Q3 FY24. The monthly fiscal data indicates that the combined capex by central and state governments moderated to 10.5% YoY in Q3.
  4. On the  external front, while exports improved, imports posted a mild moderation. This resulted in the ratio of net exports to GDP easing to -2.9% in Q3. 
  5. Discrepancies in GDP data continues to remain sizeable. In Q4 FY24, as much as 2.5 percentage points of headline GDP growth of 7.8% was seen on account of discrepancies. As more information is available, likelihood of some downward adjustment cannot be ruled out.

Outlook

The GVA/GDP data for FY24 has its hits and misses. At a headline level, the underlying momentum exceeded both official and market estimates by a considerable margin. Expectedly, public capex has led from the front, although this was offset by weak growth in public revex and private consumption. On the external front, the net exports ratio moderated to its 3-year low levels – thus reflecting easing of pressure on India’s current account deficit.

Going forward, we expect a change in some of the growth drivers.

• Primary  sector growth is expected to bounce back sharply on the expectation of above normal rainfall in the upcoming south-west monsoon season. This augurs well for of rural consumption demand, which has started to see tailwinds from waning of inflationary pressures, faster increase in rural wages and continued fiscal support measures (free foodgrains, reduction in LPG prices, elections related distribution of durables among others).
  
• Urban consumption is likely to moderate in FY25 amidst normalisation of post COVID demand, esp. for contact intensive services. In addition, lagged impact of higher interest rates as well as tighter regulatory measures for unsecured lending, are likely to weigh on discretionary demand for goods.
• There is a likelihood of moderation in public capex growth in FY25 as per initial budgetary signals (however, there is a possibility that the central government deploys the higher than budgeted RBI dividend towards additional capex).
• On the external front, there is a likelihood of a mild improvement in exports on the back of continued resilience in global demand. Having said, geopolitical risks would need to be carefully monitored.
• We expect WPI inflation to jump to 3.0% in FY25 from -0.7% in FY24. This sharp reversal amidst a moderation in output price inflation (CPI is projected at 4.5% in FY25 vs. 5.4% in FY24) would weigh upon corporate margins, thereby reducing the boost to value-add seen in FY24.

On net basis, we hold on to our FY25 GVA growth estimate of 6.6%. This should translate into a GDP growth of 6.8% assuming normalization of the statistical impact from net indirect taxes.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “Indian economy has continued to surprise the markets by recording a GDP growth of 7.8% in Q4FY24 and 8.2% for FY24 as a whole. The GVA growth of 7.2% for FY24 indeed has exceeded most expectations with a robust growth in the manufacturing sector at 9.9% as compared to a negative 2.2% in FY23. This is also despite the 1.4% muted growth in the agricultural sector brought about by the El Nino phenomenon.

While the momentum in the economy continues to be strong, there are two factors that had a meaningful contribution to the higher than expected GDP growth nos in the previous year. One is the deflation or very low WPI inflation witnessed in FY24 which leads to lower differences between real and nominal GDP growth. As WPI inflation normalizes to ~3% or higher, the difference between the two growth prints will revert to the average levels. Secondly, the upside in tax collections and the lower than budgeted subsidy payouts have also helped in elevating GDP growth as compared to GVA growth.

While the momentum in the economy continues to be strong, there are two factors that had a meaningful contribution to the higher than expected GDP growth nos in the previous year. One is the deflation or very low WPI inflation witnessed in FY24 which leads to lower differences between real and nominal GDP growth. As WPI inflation normalizes to ~3% or higher, the difference between the two growth prints will revert to the average levels. Secondly, the upside in tax collections and the lower than budgeted subsidy payouts have also helped in elevating GDP growth as compared to GVA growth.

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

Chart 1: Net indirect taxes led to unusual divergence b/w GVA/GDP growth in FY24