Q2 GDP: Despite higher-than-anticipated growth, concerns still abound

The economy seems to be in better shape than anticipated. Growth prospects appear much brighter than earlier believed, and government finances are in better shape, with the fiscal deficit more manageable than expected.

Official estimates for gross domestic product (GDP) growth in the July-September quarter of financial year 2023-24 (Q2FY24), that were released on November 30, reveal that the economy grew at 7.6 per cent year-on-year against 7.8 per cent in Q1. It was significantly higher than the Reserve Bank of India’s (RBI) estimate of 6.5 per cent.

This growth was aided by a nine-quarter-high expansion in the manufacturing sector, of 13.9 per cent. The construction sector, too, grew by 13.3 per cent in Q2, while mining grew 10 per cent, and electricity and utilities clocked a similar 10.1 per cent growth. However, growth in the services sector moderated to 5.8 per cent, while agriculture grew by a mere 1.2 per cent.

GDP growth of 7.7 per cent in the first half of the fiscal implies that the economy is likely to grow at a higher rate than the official estimate of 6.5 per cent for the financial year.

“The numbers impart a certain upside to the 6.5 per cent growth projection for FY24. We will have to see how to rework it,” Chief Economic Advisor V. Anantha Nageswaran said soon after the data was released, while underscoring that the growth momentum is expected to continue in Q3.

The Union Ministry of Finance is likely to release its revised GDP growth forecast for the fiscal in the next monthly economic review or could do so in the Interim Budget 2024-25. But private agencies have already scaled up their projections. Financial services major Morgan Stanley revised its GDP growth forecast for the fiscal to 6.9 per cent from 6.4 per cent. “The GDP print has surprised on the upside for three consecutive quarters, indicating underlying strength in certain pockets of the economy. High-frequency data exhibit strength: real GST collections are tracking at 9.6 per cent and real credit growth at 13.7 per cent in the calendar year to date 2023; PMIs have been above the 50-mark since July 2021,” it noted while maintaining its growth forecast at 6.5 per cent for FY25. A reading above 50 in the purchasing managers’ index, or PMI, compiled by financial services major S&P Global, indicates expansion, and a reading below that threshold indicates contraction.

SBI Group Chief Economic Advisor Soumya Kanti Ghosh said the overall growth in FY24 would be around 7 per cent, assuming 6-6.2 per cent growth in the second half of the fiscal.

“Though there are chances that it may cross the 7 per cent mark in FY24,” he said in an SBI Ecowrap research report.

Growth in gross fixed capital formation (GFCF), a bellwether of investments, was at a robust five-quarter high of 11 per cent YoY in Q2, while government spending rose by 12.4 per cent, which was a 10-quarter high. Analysts believe government spending has been high with its focus on capital expenditure and front-loading ahead of the assembly and general elections.

Significantly, the investment rate, measured as the nominal GFCF-to-GDP, also rose to 30 per cent in the second quarter of the fiscal from 29.1 per cent a year ago. Meanwhile, the fiscal deficit came in at a comfortable 45 per cent of Budget Estimates in the first half of the fiscal, or Rs 8.04 lakh crore, indicating that the government continues to have sufficient legroom to spend.

Union Finance Secretary T.V. Somanathan has also underlined that the fiscal deficit target of 5.9 per cent of GDP for FY24 will be met despite concerns that there may be additional spending ahead of the general elections in 2024. “It is not a snap election. We knew it was an election year,” he said recently.

But pockets of concern remain, and the consensus is that growth will slow down in the second half of the fiscal. “Overall, headline GDP has surprised positively, but the government appears to be in the driver’s seat—both for consumption and investment. Private consumption and private capex remain weak, in our view. Lower commodity prices are also a major tailwind, as they have pushed up the bottom line (profits) amid slowing top line (sales), implying a major growth tailwind due to terms of trade,” Sonal Verma and Aurodeep Nandi, economists at Japanese investment bank Nomura, said in a note.

Slowing private consumption at 3.1 per cent in Q2 and possible rural distress amidst lower agricultural growth and uneven rainfall are other red flags highlighted by analysts, although the Union finance ministry feels high-frequency data points to continued festive spending in October and November and sales even in rural areas. The manufacturing PMI rose to 56 in November from 55.5 in October, indicating a robust performance of the sector. GST collections shot up by 15 per cent to Rs 1.68 lakh crore in November.

Volatile Brent crude oil prices are another challenge. What’s more, the looming presence of the 2024 general elections has cast a shadow on the government’s focus on capital expenditure as well as the nascent recovery in private investments. Historical trends indicate that capex tends to slow down ahead of elections. The sustenance of the growth trajectory hinges now on the rural economy and overall consumption, which are necessary for private investment to fully take off.

@surabhi_prasad