India’s economy in April to June likely grew at the fastest pace in a year, bolstered by central and state governments opening up their wallets for capex, stronger consumption demand and higher activities in the services sector, according to some economists.
A median forecast of an ET poll of 20 economists pegged the growth rate at 7.8 per cent for the first quarter of this financial year that started Apr. 1. The estimated range in the poll was 7.5-8.5 per cent. The Reserve Bank of India has forecast a growth rate of 8 per cent.
While India’s GDP grew 6.1 per cent in the March quarter of FY23, it had grown at 7.2 per cent in FY23 as a whole.
Continued improvement in services demand and investment activity, and lower commodity prices spurred growth while unseasonal heavy rains, a lagged effect of the monetary tightening and weak external demand exerted a downward pressure on GDP growth in Q1FY24.
Services lead the way
Economists have opined that India’s services sector likely took the front seat, a trend seen in the last quarter of FY23.
“High-frequency indicators for air and rail travel confirm continued steady demand in the transport sector, although capacity constraints, along with a catchup to pre-Covid levels of activity, mean some moderation in momentum compared with the previous quarter,” said Rahul Bajoria, head, EM Asia, ex-China, economics, Barclays. The firm has pegged a growth rate of 7.8 per cent.
India’s services sector growth had hit a 13-year high in July, data from S&P Global PMI showed. ICRA in its report estimated that the services’ gross value added (GVA) likely grew 9.7 per cent in Q1FY24 from 6.9 per cent in Q4FY23.
“Economic activity in Q1 FY-2024 was boosted by a continued catch-up in services demand and improved investment activity, particularly a welcome front-loading in government capital expenditure,” noted Aditi Nayar, chief economist at ICRA, while forecasting a growth rate of 8.5 per cent.
Capex thrust
The Narendra Modi-led government has continued its focus on capital expenditure in recent months. Capital expenditure increased to around Rs 2,78,500 crore during April–June 2023 from the Rs 1,75,000 crore spent during the same period last fiscal year.
The central government likely spent 27.8 per cent of the budgeted amount in Q1, while state governments’ spend was 12.7 per cent. Further, capex spending by the Centre and 23 states (excluding Arunachal Pradesh, Assam, Goa, Manipur and Meghalaya) was up 59.1 per cent and 76 per cent on an annual basis.
States such as Andhra Pradesh, Telangana, and Madhya Pradesh where elections are due saw capital expenditure growth of up to 41 per cent, an SBI Research report showed.
<div class=”flourish-embed flourish-chart” data-src=”https://bfsi.economictimes.indiatimes.com/news/industry/indias-q1-gdp-growth-may-hit-one-year-high-banking-on-capex-spike-services-activity-economists/visualisation/13981065″><script src=”https://public.flourish.studio/resources/embed.js”></script></div>
However, economists expect heavy rains to have played a spoilsport by causing production disruptions. “Unseasonal heavy rains, the lagged effect of the monetary tightening, and weak external demand exerted downward pressure on GDP growth,” ICRA’s Nayar said.
Despite disruptions, corporate results in the first quarter of FY24 displayed signs of resilience with EBITDA and PAT growing over 30 per cent on an annual basis and revenues growing around 3 per cent. Yet, results for India Inc. ex BFSI, show an almost flat topline, as per a study by SBI Research. The growth wasn’t broad-based either.
“Corporate performance in the (April-June) quarter pointed to a sharp pick up in profits, though not broad-based. This reflected a cooling-off in input costs, whilst sales growth eased,” said Radhika Rao, senior economist, DBS group.
Corporate margins, under pressure for the last few quarters due to higher input prices, have started showing improvement since Q4FY23, the study showed.
FY24, the road ahead
The RBI expects India to grow at 6.5 per cent in FY24. Twenty two economists in the ET poll estimated a median growth of 6.2% for the full year.
“We expect GDP growth to moderate to 6.5% in FY24 from 7.2% in FY23 due to base normalisation, moderation in urban demand, uneven recovery in rural demand and weak external demand,” said Rajani Sinha, chief economist, CareEdge.
Uneven monsoon, peppered with El Nino worries is likely to affect India’s consumption revival, in a scenario where global growth rates are slowing.
“While domestic consumption and investment demand are expected to continue driving growth, global and regional uncertainties and domestic disruptions may keep inflationary pressures elevated for the coming months, warranting greater vigilance by government and the RBI,” the finance ministry said in its monthly economic report for July.
The RBI hiked benchmark lending rates by 250 bps since last May before taking a breather for two meetings. While the RBI, and Finance Ministry have dubbed the recent vegetable price spike a seasonal aberration, they have called for more vigilance to keep the price rise in check.
Economists do not expect GDP data, due to be released on August 31, to alter RBI’s outlook for policy rates.
