– By Rumki Majumdar
India witnessed a big leap in GDP on the leap day, as the GDP growth of 8.4% in Q3FY2024 surpassed all expectations. The market had penciled in slower growth this quarter with YoY growth expected to range between 6.6% and 7.2%. At Deloitte, we had expected the growth this quarter to be 7.4%.
The past three quarters’ data points to India’s resilient economy despite the modest global economic growth and continued geopolitical crisis. Adding to the good news is that the past quarters’ data have been revised up substantially, which means just within the first 3 quarters, India’s GDP grew by 8.2% YoY.
From the expenditure approach method, GDP growth in the third quarter was supported by a strong uptick in private investment spending, which grew 10.6% YoY. Investment growth has remained above 8% YoY in the last four quarters, which indicates that India is at the cusp of a new private capital expenditure cycle. High government capex spending over the past few years and reforms and initiatives to improve the business ecosystem are finally crowding in private investments.
Despite strong growth, growth in private consumption expenditure (3.5% YoY) was less impressive. The IIP growth of consumer durables and improved passenger vehicles did point to strong urban demand, but weak rural demand weighed on total consumption. The rural demand reels under the pressure of poor agricultural growth and uncertain rabi crop production. That said, the latest Household Consumption Expenditure Survey (HCES) show that the average monthly per capita consumption expenditure (MPCE) gap between rural and urban households in India has reduced in the last decade. If the current trend is just an aberration and if the average MPCE in rural households bounces back, we are hopeful that rural demand will drive consumption growth alongside urban in the coming quarters.
The biggest drag to the third quarter growth was government consumption spending, which contracted by 3.2% YoY compared to a growth of 13.8% YoY in Q2. This possibly points to the frontloading of government capex in the first half of the fiscal year. With private investment picking up pace, the government is probably calibrating its spending down. Net exports contribution was modest as global uncertainties weighed on overall growth in exports of goods and services (3.4% YoY). Imports fell faster than exports (8.3% YoY) due to declining crude oil prices.
From the production approach method, the GVA grew 6.5% YoY, which was more in line with the market expectations. Manufacturing (11.6% YoY) and construction activities (9.5% YoY) were the biggest growth drivers. Services sector growth remained steady at 7% YoY.
The agriculture sector contracted (-0.8% YoY) for the first time since 2019, which was partly expected as temporal rains impacted kharif crop production, which is an important crop in India. Poor farm growth could further stress rural demand in the coming quarters and may impact consumer spending. The government will likely monitor the food supply chain to ensure poor agricultural output does not translate into higher food inflation, which has been lately on the rise.
The stark difference between real GDP and GVA growth is hard to miss. From an accounting point of view, buoyancy in net indirect taxes (34% YoY) led to a strong GDP. But from an economics point of view, the economy is showing signs of demand-supply mismatch, with supply-side growth lagging the rebound in domestic demand. With inflationary pressures being high, this could mean that the RBI may decide to keep the monetary policy tight for some more time.
The other good news was that the fiscal deficit was 64% of the budgeted estimate. The government has been cutting down its spending (as evident from the contraction of the government expenditure number), which will help the government adhere to its fiscal deficit target of 5.8% of GDP in FY2024. This also sends a strong signal that the authorities have control over their expenses and provides investors the confidence to invest in India. With private investment picking up and global liquidity expected to ease later in the year, fiscal prudence will help crowd in more private capital inflows and improve the supply side of the GDP.
(Rumki Majumdar is the Economist at Deloitte India.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)
