MUMBAI: Stating that the economy has likely lost the steam sequentially, when it clipped past 7.8 percent in the June quarter, due to the poor show by the services and farm sectors, Icra Ratings has forecast that the economy would have grown 7 percent in the September quarter, which is the most consensus estimate including that of the revised forecast by the central bank.
“The GDP expansion is likely to have eased to 7 percent in Q2 from 7.8 percent in Q1 of the current fiscal, primarily because of lower expansion in the services sector from 9.3 percent in Q1 to 7.4 percent in Q2 and of the agriculture sector to over 3.5% from around 3.7%, which will likely outweigh a pick-up in the performance of the industrial sector to 7.8 percent which will be a five-quarter high from 6.3 percent, Icra's chief economist Aditi Nayar said in a note on Monday.
This will also have narrowed down the GVA expansion 7.1 percent from 7.6 percent, Nayar said, adding that services exports eased to 8.7 percent in Q2 (or $101.6 billion) from 10.1 percent in Q1 ($97.4 billion), the slowest pace of growth in six quarters.
Overall, the agency estimates services GVA to moderate to 7.4 percent in Q2 from the eight-quarter high of 9.3 percent in Q1, dampened by the lower expansion in government spending and services exports. Despite an above normal and early monsoons supporting kharif sowing, flooding in many parts of the country in August-September and untimely rains in October might have damaged the standing crops or delayed harvesting. While kharif sowing exceeded last year’s acreage, the adverse base is anticipated to keep the agri-GVA expansion at around 3.5 percent in Q2 (4.1% in Q2 FY25), similar to 3.7% in Q1 (+1.5% in Q1 FY25).
The agency estimates net indirect taxes to contract on annualised basis in Q2, after having risen by 9.5 percent in Q1, as a result the indirect taxes will decline to -5.2 percent from 11.3 percent in Q1, amidst the shallower contraction in its subsidies (to -4.6% from -7.3%). Accordingly, the gap between the GDP and the GVA growth is expected to revert to the negative territory at 10 bps in Q2, after being positive (18 bps) in the previous quarter, she said.
“A lower annualised growth in government spending is likely to weigh on the pace of the GDP and GVA growth in Q2 compared to Q1. However, inventory stocking related to the early onset of the festive season, enhanced by the GST rate cuts induced volume pick-up, and upfronting of exports to the US ahead of the tariffs, are expected to boost the performance of the manufacturing sector, and help industry GVA growth outpace that of the services after a gap of four quarters,” Nayar said.
“Unless the government capex allocation is enhanced and the tariff-related uncertainties ebb, the GDP growth appears set to ease below 7 percent in H2, though the timely GST rate cuts may result in a steady boost in volumes of consumer non-durables going ahead, consumer durables may see a trend of premiumisation instead of a sustenance of the spike in volumes that was seen during the festive season,” she warned.
While government gross capex likely to have moderated to 30.7 percent in Q2 (10.3% in Q2 FY25) from 52 percent in Q1 (vs -35% in Q1 FY25), in absolute terms, the monthly average capex rose to Rs 1,01,900 crore in Q2 from Rs 91,700 crore in Q1, despite the above-normal monsoons. Based on the available data for 22 states, their aggregate capital outlay and net lending contracted by 4.6 percent in Q2 from 7.3 percent in Q2 FY25, after the 23 percent expansion in Q1 (vs -19.1% in Q1 FY25), mainly reflecting the unfavourable base effect.
On an average, the monthly capex rose to Rs 54,400 crore in Q2 from Rs 37,800 crore in Q1. Further, the centre’s non-interest revenue expenditure contracted by a sharp 11.2 percent in Q2 from 6.9 percent growth in Q1. Besides, the combined non-interest revenue expenditure of these 22 states halved to 5.3 percent in Q2 from 10.9 percent in Q1.