Economy well on track but growth not yet broad-based
The Indian economy is going full throttle. The second-quarter (Q2) gross domestic product printed on the upside at 7.6 percent, with government spending, private investments and domestic demand all contributing their bit. With growth in the first half of the fiscal settling down at 7.7 percent, full-year forecasts are being revised upwards to 7 percent, assuming 6.2-6.4 percent growth between October 2023 and March 2024. The higher-than-expected growth in Q2 was underpinned by cyclical factors including robust corporate profits, high government consumption, a robust financial sector, and rising private investments. However, Q3 and Q4 may see cyclical headwinds in the form of relatively slower government spending, sub-par agricultural output that could dampen rural consumption, tighter lending, and weaker exports.
While Q2’s headline number is heartening, growth seems to be uneven across sub-components. If industry’s nine-quarter high growth at 13.2 percent as against 5.5 percent in Q1 brings cheer, softening agricultural and services sector growth is disappointing. The agri sector is likely to be affected by uneven rainfall and could delay rural demand recovery, which in turn could drag growth in the second half (H2) of FY24. It was weak rural consumption that took away the punchbowl in Q2, leading to a pale 3.1 percent headline growth in private consumption. The relevance of rural demand becomes clear from the fact that overall consumption demand took a severe knock despite urban demand remaining buoyant as can be seen from the rise in bank deposits and credit, particularly, the unstoppable growth in personal loans. On the supply-side, manufacturing and construction led the pack, driven by improvement in corporate profitability and strong growth in industrial production. Construction too was up, thanks to housing as well as high government capital expenditure. Mining and electricity clocked 10 percent growth each, supporting overall growth. However, the biggest setback came from the trade, hotels, and transport segment that saw a growth of 4.3 percent—a 10-quarter low.
As for Q3, preliminary estimates suggest decent growth thanks to festive season sales. But analysts expect growth to moderate in H2 due to the lagged impact of interest rate hikes, tightening financial conditions, erratic weather, and geopolitical tensions that could weaken exports. Given the upcoming general elections, there will be temptation to raise capex to prop up growth but the government must exercise fiscal prudence.