Trumping economists’ expectations of a 6.6 per cent growth, the Indian economy grew at a mouth-watering rate of 8.4 per cent in Q3FY24, a six-quarter high. Digging deeper, economists say one must interpret the headline growth figure with a pinch of salt.
The headline GDP figures for the first and second quarters of the ongoing financial year have been revised to 8.2 per cent and 8.1 per cent each, up from 7.8 per cent and 7.6 per cent respectively. Moreover, based on the Second Advance Estimate, the Centre now expects the Indian economy to grow at 7.6 per cent in FY24, higher than the previous estimate of 7.3 per cent.
These figures may be key to the Narendra Modi government’s pitch for a potential third term in the government, ahead of the Lok Sabha elections. The government has been lauded by economists, India Inc. and politicians alike. Dalal Street rose 700 points on Friday, buoyed by the reading.
GDP numbers say: High divergence
The numbers released by the Ministry of Statistics and Programme Implementation (MOSPI) show a 10-year high divergence that economists see as contradictory.
Apart from the Gross Domestic Product (GDP), it is the Gross Value Added (GVA) that helps decipher how well a country’s economy is performing. GVA helps calculate the performance from the supply side of things. Simply put, GVA is GDP excluding indirect taxes and subsidies.
India’s GVA growth moderated to 6.5 per cent on an annual basis in Q3FY24, in line with economists’ expectations. India’s GVA has slowed down in Q3 from 8.2 per cent in Q1FY24 and the upward revised figure of 7.7 per cent in Q2FY24.
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The gap between GDP and GVA had averaged 20 bps in the last eight quarters. It has now widened to 190 bps this time around. Economists see this divergence normalising in the coming quarters.
In essence, this divergence can be attributed to the large jump in net indirect tax growth.
Citi’s Samiran Chakraborty held a similar view, saying that the above-8 per cent reading must be read with caution. “The above-8 per cent real GDP print should be read with caution given the large gap with GVA, decline in agriculture activity and two-paced economic growth (investment far outpacing consumption),” he wrote in a note.
India sees uneven economic growth
Indian industries fared well in the December quarter, with manufacturing and construction growing 11.6 per cent YoY and 9.5 per cent YoY respectively, reflecting the public capex support push.
The services sector too fared well, with recovery seen in the Trade, Hotel, Transport, and Communication segments, in addition to Financial, Real Estate, and Professional Services.
However, in line with the narrative, private consumption growth in India leaves much to be desired, having grown 3.5 per cent in Q3.
“Although a pickup in private consumption was anticipated, owing to the festive season buoyancy that proxy indicators had pointed towards, the extent of upside was underwhelming for sure,” news agency Reuters reported Yuvika Singhal, an economist at QuantEco Research as saying.
Interestingly, the government’s spending declined sharply as it contracted 3.2 per cent in Q3FY24, having grown 13.8 per cent in Q2.
Gross Fixed Capital Formation (GFCF), or fixed investment, continued to drive growth, up 10.6 per cent in Q3. The reading in Q2 stood at 11.6 per cent. Monsoon disappointment meant that agriculture GVA growth contracted 0.8 per cent in Q3, down from 1.6 per cent in Q2.
Economists at Nomura have said that India’s economic growth will continue to remain resilient. However, if one considers ‘core GDP’, which is GDP excluding valuables, discrepancies and inventories (volatile components), then India’s underlying growth has in effect slowed to 4 per cent in Q3 from 4.7 per cent in Q2.
“The Q4 GDP growth reading, while superlative, should not be interpreted as evidence of strong growth. The moderation in core GDP growth and in GVA growth suggests growth remains uneven,” wrote Sonal Varma and Aurodeep Nandi, economists at Nomura in a note.
They note that the Indian economy continues to be primarily supported by strong public capex growth, while private consumption and private capex remain subdued.
“The sustainability of investment growth in the medium-term hinges significantly on the imperative need to strengthen consumption growth. The escalation of global geopolitical tensions and slowing external demand can further add to the downside risks to external sector,” said Rajani Sinha, Chief Economist at CareEdge.
FY25: The stage is set
The Central government and the Reserve Bank of India expect the country to register an above-7 per cent growth rate for the third straight year in FY24, a record that the Modi government would keenly cherish, given that the feat has been achieved in a volatile global environment, putting India in a ‘Goldilocks’ zone.
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That said, Nomura has warned that ahead of the upcoming Lok Sabha elections, the code of conduct may negatively impact the public capex support. Patchy recovery in private capex, weak state of consumption and ebbing terms of trade advantage for corporates as input costs rise are headwinds to growth ambitions.
Interestingly, an SBI Research report noted that colloquially, due to downward revision in FY23 GDP numbers by 25 bps, the fiscal deficit of FY24 as a percentage of GDP will now be revised upwards to 5.9 per cent from 5.8 per cent of GDP
Given that the Indian economy is still being largely pushed by public capex support, it is interesting to note that FY25 is expected to mark the fourth consecutive year when the rate of investment growth outpaces consumption, wrote DBS Bank Economist Radhika Rao in a note.
This streak was last witnessed in 2004-2008 when the country was governed by UPA under Prime Minister Manmohan Singh.
