India's Q1 GDP At One-year High Of 7.8%, But Misses The Target Of 8%

India's gross domestic product (GDP) reported the highest growth in a year, rising by 7.8% in the April-June quarter of the current fiscal (2023-2024) pushed by strong growth in the construction, financial and real estate sectors. This was compared to a growth of 6.1% in the previous January-March quarter or Q4 of 2022-23. 

India’s GDP growth rate stood at 7.2% for FY 2022-23. India had witnessed a much higher growth in the same quarter previous year as the growth rate was 13.1% in Q1 of FY 2022-23 (April June quarter).

While the growth rate was higher than the previous quarter, it failed to meet the Reserve Bank of India’s (RBI) estimated growth forecast of 8%. Several research reports by the State Bank of India (SBI Ecowrap) and Investment Information and Credit Rating Agency (ICRA) had expected the Indian economy to grow at 8.3% and 8.5% respectively. 

 

Why?

A steep jump in private consumption, and remarkable performance of financial sector companies, along with state and central government spending (public administration and defence component) helped boost GDP growth. 

“Strong government capex and credit growth expectedly led to double-digit construction sector growth and financial services growth respectively,” said Madhavi Arora, lead economist at the Emkay Global Financial Services. Private consumption expenditure which comprises the majority weight in the GDP grew by 6%. 

Sector-wise detail indicates growth led by the services sector and continued expansion in the manufacturing sector. Within the services sector, growth in private services remained strong, led by real estate and the financial sector, contact-intensive trade, hotels and transportation. 

“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. Listed company performance had shown strong profit growth for the services sector and continued expansion in the manufacturing sector. The decline in input cost pressures has supported company profitability, more than countering slowdown in sales growth,” said Gaura Sengupta, economist at the IDFC First Bank.

Economists highlighted that the real estate market contributed significantly to the GDP growth this quarter. As reported by The Core earlier, there has been a surge in the sale of both affordable and luxury housing in the past year and it has contributed significantly to the GDP growth. 

Why Did It Miss The Estimate Of 8%?

Economists said that the weakness in external demand as indicated by a contraction in exports, has impacted GDP growth. India’s merchandise exports registered contraction for the sixth consecutive month in July 2023, declining by 15.9% (y-o-y). 

“The contraction in exports was broad-based, with more than two-third of the export basket (19 out of 30 major commodities) registering a y-o-y decline. However, commerce ministry data in rupee terms indicate that exports increased by 1.7% in Q1FY24,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

Another factor that adversely affected the GDP for this quarter is the climatic conditions. 

“GDP growth signalled that contact-intensive services that have done the heavy lifting so far seem to be flattening out. Agriculture growth was likely pulled down by weather-related disturbances and almost flat rabi output,” said Sakshi Gupta, senior economist, at HDFC Bank. 

Contact-intensive sectors include certain goods/services that require consumers to gather in large crowds and/or come in contact with other people, like hospitality, tourism, retail, recreation, and entertainment.

“Slight miss in real GDP for Q1FY24 was mainly on account of slippage in government consumption and drop in exports. Sector-wise, growth in the agriculture and utility sector was disappointing,” said Sonal Badhan, economist, at Bank of Baroda. 

However, Dr. V. Anantha Nageswaran, Chief Economic Adviser (CEA), Ministry of Finance,  mentioned during the press briefing that there are several factors that might pose a downside risk to the Indian economy. As pointed out by the CEA, a slowdown in the global economy and trade may moderate export growth. Also, firming of prices of brent crude may require further vigilance and prolonged geo-political uncertainty and tightened financial conditions also pose a challenge to the growth outlook.

Future Prospects Of India’s Economy

Economists expect that GDP growth is likely to see a sequential pick up in the coming quarter and maintain their GDP growth estimate of 6.2% for the entire financial year. Nominal GDP growth in Q1FY24  slowed to 8.0% YoY from 10.4% in Q4FY23, reflecting a slowdown in deflator growth. GDP deflator measures the GDP affected by the change in the price of the products and goods rather than the output of an economy.

“WPI inflation, which accounts for the majority share in deflators, had turned negative in Q1. Indeed, for the full year we see FY24 nominal GDP growth tracking at 9% or lower, due to weakness in deflator growth v/s 10.8% growth assumed in the Union Budget,” added Sengupta.  

Apart from the base effect, a slowdown in global growth and risks to our agricultural growth (because of uncertain monsoon activity) will play critical roles, believe economists.

“We expect private spending to continue being supportive as inflation gradually comes down. However, if agri input remains low, a boost from private consumption may not be as much as anticipated. Inflation levels and periods of elevated rates (by RBI) will also impact growth. While we expect 6.3% growth in FY24, risks are titled to the downside,” said Badhan. 

 

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