India’s GDP data was keenly awaited, coming on the back of sovereign rating outlook upgrade by S&P and just days before the union election results are out. Indeed, it has surpassed market expectations, with a growth of 8.2 per cent in 2023-24 as against 7 per cent in 2022-23. It is to be noted that the growth in 2023-24 is much higher than MOSPI’s second advance estimate of 7.6 per cent released in February. While overall GDP growth is impressive, it is important to understand some of the nuances of the data to infer the sustainability of the growth this year.
While the fourth quarter growth has been strong at 7.8 per cent, there has been upward revision in the previous quarter numbers and that has strongly propped up the overall GDP growth for the year. Another important point is the sharp divergence of 1 percentage point between GDP and GVA growth in 2023-24 as against 0.3 percentage point in 2022-23. This is mainly because of sharp growth in net taxes (due to higher tax collection and lower subsidies). This has also aided in pushing up the GDP growth.
If we look at the sectoral break-up, as expected, overall agriculture value added growth has been muted, given the poor monsoon last year. Supported by lower input prices, manufacturing GVA has shown a healthy recovery, with growth of 9.9 per cent in 2023-24 (as against contraction in 2022-23). While services sector growth has been healthy at 7.6 per cent, there has been some moderation in the fourth quarter. There has specifically been a moderation in the segment of trade, hotel, transportation, and communication after strong growth in 2022-23. The construction sector has remained robust, recording a growth of 9.9 per cent in 2023-24.
If we look at the break-up of GDP from the expenditure side, we find that the overall GDP growth is not very broad-based. Private consumption, the main pillar of the economy, has grown by a feeble 3.8 per cent in 2023-24. This is the slowest consumption growth rate in the last two decades (excluding the pandemic year contraction). Investment, the other pillar of the Indian economy, has grown by a healthy 9 per cent. Investment in the economy has been mainly led by the government sector. Central government’s capex has grown by a healthy 28 per cent in 2023-24, while aggregate state capex (for 19 major states) has grown by around 33 per cent in April-February. While the private sector is showing signs of recovery, a strong broad-based recovery in the private capex cycle is yet to be seen.
Exports, the third pillar of India’s economy, have been muted due to weak global growth. While India’s services exports have remained healthy, merchandise exports specifically felt the pinch of global slowdown.
Going forward, we expect India’s GDP growth to moderate. However, it is estimated to be still healthy at around 7 per cent this year. For the growth momentum to be sustained, the most critical aspect would be an improvement in private consumption. While the higher income category has been spending, the lower income category remains cautious amidst high inflation and low wage growth. Rural demand had also been weak due to poor monsoon last year. With normal monsoon expected this year, we can expect a revival in rural consumption demand. We are already seeing some signs of improvement in rural demand as reflected by healthy growth in two-wheeler sales and recovery in FMCG sales volume in rural areas (as reflected by Nielson data). However, appropriate spatial and temporal distribution of rainfall will be critical for rural demand recovery. Moderation in food inflation will be another prerequisite for rural consumption revival. Improvement in the employment scenario will also be an important piece for consumption revival. EPFO’s payroll data shows improvement in net enrolment in the second half of 2023-24. However, poor hiring by the IT sector, a major employment generator for the economy, remains a concern. Improvement in the employment situation in the unorganised sector will also be critical.
A pick-up in the private capex cycle is another important requirement for sustained growth momentum. With capacity utilisation in manufacturing at 75 per cent (close to the long-term average), and bank and corporate balance sheets in good shape, the ground is set for capex revival. The private sector is showing increasing intent to invest, as reflected by the CMIE data on investment projects announced. However, the critical aspect here will be policy certainty and confidence in global and domestic economic stability. Of course, a sustained revival in consumption demand would be most critical for private investment to pick up meaningfully.
The other important factor to watch out for is developments in the global arena. With the global growth outlook improving, India’s exports are likely to improve. However, with geo-political tensions brewing, the risk of supply shocks continues to linger. The recent uptick in global commodity prices, specifically industrial metals prices, could adversely impact the Indian economy through higher input cost. Further worsening of US-China trade relations or aggravation of global debt woes could send the global economy in a tizzy, with repercussions for the Indian economy.
In a nutshell, while the Indian economy has recorded impressive growth, there is a need to exercise caution and take some quick actions to ensure sustainability. In the next few days, a new government will be formed that will have a tall task at hand to ensure high economic growth, even while moving towards fiscal consolidation. The most important challenge that the new government should take on is ensuring a broad-based consumption revival, while continuing the focus on capex-led recovery. Increasing job opportunities in urban and rural areas should be a priority. Sustained consumption growth and high capex by the government will help in the pick-up of the private capex cycle. For economic growth to be sustained, it will be important for the new government to ensure that the benefits of high growth trickle down to the lower income categories.
The writer is chief economist, Care Edge Ratings
