The estimates of Gross Domestic Product (GDP) for the first quarter of the current financial year (April-June of 2023-24) were released recently by the National Statistical Office (NSO). The economy’s real GDP (at 2011-12 Prices) is estimated to have reached at ₹ 40.37 lakh crore in Q1 2023-24 as against ₹ 37.44 lakh crore in Q1 2022-23. However, at Current prices it increased from Rs. 65.42 lakhs to Rs. 70.67 lakhs in the Q1of 2023-24 as compared to the corresponding period last year.
The comparative growth rate on y-o-y basis has been depicted in the chart below:
As we can see clearly that the growth rate of the India’s GDP has been lower in percentage terms as compared to the corresponding period of the previous year yet the fact is that the Indian economy is continuing as the fastest growing economy of the World and has grown at its quickest pace in a year. Also, the year-on-year (Y-o-Y) growth rates are pretty much affected by the respective year’s immediate previous year performance.
Sectoral performance has yielded mixed results
The growth rate in Agriculture and allied activities is estimated to be 3.5 per cent which is higher than 2.4 per cent last year but lower than 5.5 percent in Q4 of FY 23. The other sector where the growth rate has been higher than the last year is Financial, Real Estate & Professional Services which has manifested a double-digit growth rate of 12.2 per cent.
In the Mining and Quarrying sector (5.8 per cent), Public Administration, Defense & Other Services (7.9 per cent), Trade, Hotels, Transport, Communication & Services related (9.2 per cent) the growth rate have been lower than the corresponding period of the last year yet they have been higher than the immediately preceding quarter (Q4 of FY23) which again can be considered as a positive indication.
In the electricity sector the growth rate has been dismal at 2.9 percent which is lower than the Q4 as well as Q1 of the last year. In construction also it is lower than the Q1 and preceding quarter (Q4) of previous year, yet, it managed to grow at 7.9 per cent which is higher than the overall average growth rate estimated for the current quarter.
Growth rate in manufacturing and financial services both is a welcome sign
There has been a improvement in the manufacturing activity in the Q1 of the current fiscal year. Yet the good thing is that this trend is likely to continue in this quarter as well. According to the released by the S&P Global India Manufacturing Index (PMI) the pace of new orders by the purchasing managers have grown at the quickest rates in last three years in the month of August, 2023.
The major factors that contributed to the record increase in PMI are- increase in demand strength, smooth supply chains, competitive pricing and effective advertising. There has been a continued positive growth in employment which was still staying above the trend line in the month of August. New export orders have been increasing in last 17 months but what is remarkable is that not only they have increased to the greatest extent since November, 2022 but the export basket is getting diversified as well.
Though the S&P Global India Services PMI dropped a tad to 60.1 in August 2023 from an over 13-year high of 62.3 in the previous month, yet it was reported to be pretty close with market forecasts of 61 and still maintained its stature well above the cutoff point of 50.
Major Rating Agencies Revise FY24 Growth Forecast Upwards
Some of the major rating agencies have revised India’s economic growth forecast upwards for the current fiscal year 2023-24. Rating agency Nomura has raised the growth rate from 5.5 percent as estimated by it earlier to 5.9 percent for the FY24. Morgan Stanley raised it from 6.2 percent to 6.4 percent. Other rating agencies have also kept it at around 6.3 percent which indicates that the Indian economy may continue its growth spree at a robust pace in the current year as well. Although keeping inflation under the acceptable tolerance band, maintaining the growth rate of new export orders and smooth functioning across manufacturing lines shall continue to be a challenge that has to be well articulated if the growth momentum has to continue in the next FY25.
Inflation to continue as a key challenge to growth
According to the Finance Minister, taming inflation is the key to growth. If inflation rate is high, manufacturing sector has to grapple with increase in input costs as that not only it reduces their competitive edge but also their profit margins and new employment generation. Inflation zoomed to 7.44 percent in the month of July as the food prices shot up to very high levels and according to the RBI it is going to be above the higher threshold limit at 6.2 percent in the month of September 2023, though it may finally settle around 5.4 percent for the FY24 if the policy rates are not increased any further.
Maintaining investment growth is yet another challenge to deal with
The Government has given a big push to Capex in the recent times which has led to rise in investment in private sector as well. The private sector has reportedly announced highest number of new investment projects in the last 14 years. The private final consumption expenditure has registered a growth of 6% in the first quarter in the financial year which was much higher than 2.2% and 2.8% in the receding two quarters.
Although there is a minor decline of 0.7% in the Government final consumption expenditure in April-June quarter in the current fiscal year. Yet there was a 59% increase in its capex in the same quarter. This shows the inclination of the government to curb on revenue expenditure and rather increase the capex so as to give a boost to the investment in the economy.
The gross capital formation (GFCF) grew at a remarkable rate of 8% in the first quarter of FY24. The GFCF to GDP ratio increased to 29.3% in the same quarter. However, keeping in view the expectations that there might be an increase in inflation and continued stress in global economy, it may effect the demand for the consumer goods in the domestic and export sectors which may dent the investment rate.
India seen as a solution to global supply chain issues
On the other hand, due to the prolonged war between Russia and Ukraine the global supply chain has been adversely affected. India’s presidency at G20 has presented favorable opportunities to India to provide an efficient and trusted global supply chain alternative. India is unique as on one hand it has the largest consumer base in world and on the other hand has enough number of skilled and semi-skilled manpower which may be the reason that India is also being viewed upon as a solution to the global supply chain issues. India presents a platform where the global manufactures can have access to both the consumer and input markets. Besides, Indian economy is fast digitalizing and all set to take advantage of artificial intelligence and crypto currency alternatives.
Increase in interest rate in the US may effect market sentiments.
According to the recent announcement by the US Federal Reserve Chair, we may expect another 25-bases-point (bp) rate increase in the US benchmark rate and an elevated borrowing costs regime until the inflation rate falls within the target of 2 percent. However, the decision of the Fed is going to be dependent on the data related to the personal consumption expenditure, employment generation and Consumer Price Index (CPI) which the market would like to factor in order to assess whether the Fed would actually go for a rate increase at all.
India’s economy is not fully insulated from the rest of the world yet it has shown a great degree of resilience in the recent past and our central bank has responded quite sensibly trying to balance the twin objectives of maintaining growth momentum and taming inflation. Besides a number of fiscal measures have also given a boost to economic activities across sectors.
To conclude, the Indian economy has been maintaining the growth rate at higher trajectory and given the effectiveness with which it succeeds in taming inflation, there is a reasonable probability that it may continue to do well in the current fiscal.