Strong Start: Q1 GDP Growth at 1-yr High of 7.8%

In the June quarter, India's GDP grew 7.8% from a year earlier, picking up speed from the 6.1% growth seen in the previous quarter.

The economy was driven by a rapid rebound in the services sector, and the figures announced on Thursday showed signs of a revival in investment, with gross fixed capital formation increasing by 8% in the third quarter from a year earlier.

Private final consumption expenditure (PFCE), which increased 6% in the first quarter of FY24 compared to a meager 2.8% increase in the March quarter, was another indicator of an uptick in consumer demand.

“Rural demand is on a recovery mode and the government’s sustained capital expenditure push is crowding in private investments,” chief economic advisor V Anantha Nageswaran said on Friday after the data release.

Going forward, growth is anticipated to decline due to a declining base effect, a subpar monsoon, high inflation, elevated interest rates, and a potentially unfavorable global climate that would likely weigh on demand.

Election-related expenditure and seasonal demand, however, might encourage growth.

“We are going to now be entering the run-up to elections, which leads to a sharp increase in consumption expenditure. That’s the silver lining,” said Pronab Sen, former chief statistician of India. He noted that the government is preserving fiscal space for a big boom in spending starting at the end of the third quarter. “The Centre seems to be reserving its expenditure for the latter part of the year.”

Economists expect the strong Q1 start should deliver over 6-6.5% growth in FY24, a moderation from 7.2% in FY23 but a good showing given global headwinds.

“Factors like sustained buoyancy in services momentum and policy thrust to increase trend growth could counter downward pressures,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

An ET Poll of 22 economists conducted a fortnight ago had pegged median growth in FY24 at 6.2%, slower than 6.5% projected by the Reserve Bank of India (RBI).

“Our current forecast of 6% GDP growth for this fiscal would make India the fastest-growing G20 country this year,” said DK Joshi, chief economist, Crisil. Private capex revival, economists said, was important to sustain growth in the coming quarters.

“Amid evolving conditions, private capex will have to match up the pace to sustain growth momentum,” said Rajani Sinha, chief economist, CareEdge.

Experts said there are signs of a private spending recovery taking place. “Early signs of a revival of private corporate sector capex are becoming visible. The Industrial Entrepreneur’s Memorandum (IEM) and Business Expectation Index (BEI) data is indicating that the Indian economy is at the cusp of a new private corporate capex cycle,” said Ind-Ra economists Sunil K Sinha and Paras Jasrai.

Finance minister Nirmala Sitharama told ET in an interview on Wednesday that private corporates had started to invest. “I think the Indian private sector has come into the game... Investors are coming forward, industry is coming forward,” she had said. Economists noted that the 6% rise in private final consumption expenditure was also a positive. “Consumption growth is likely to be led by urban demand, with strong real urban wage growth and nascent signs of recovery in rural demand,” said Gaura Sengupta, economist, IDFC First Bank.

PFCE revival is key to a sustained recovery. “The road ahead is not going to be easy so long as PFCE does not recover fully and become broad-based,” Ind-Ra economists said. Sluggish exports pulled down manufacturing, which grew 4.7% in the quarter, compared with 6.1% in the year ago.

On the other hand, financial, real estate and professional services grew in double digits at 12.2% while trade hotels, transport, communication and services related to broadcasting expanded 9.2%. “The strong growth in real estate was indicated by stamp duty collections and pick-up in financial services was expected on the back of strong credit and deposit growth,” Sengupta said. The construction sector recorded a 7.9% rise in the first quarter compared with 10.4% growth in the March quarter, whereas agricultural growth slowed to 3.5% from 5.5%.

“The impact of El Nino on this year’s monsoon could bring agricultural growth under pressure and the spillover effect of this would be felt on food inflation,” Ind-Ra said.