GDP data for July-September today: seen slower than Q1 but consumption, capex likely drivers

The official GDP data for July-September (Q2) is scheduled to be released on Thursday evening. The National Statistical Office under the Ministry of Statistics and Programme Implementation releases quarterly GDP data on the last working day of the second month after the reporting quarter. GDP growth rate was at 6.2 percent in July-September 2022.

Growth estimates

Many economists are now expecting the growth rate to be near 7 percent, slightly higher than the growth projection of the Reserve Bank of India (RBI). The RBI had projected 6.5 percent growth for July-September and 6.0 percent for October-December. Last month, RBI Governor Shaktikanta Das said the GDP growth rate for the second quarter may surprise on the upside.

Domestic demand remains the key economic driver of activity, as external demand continues to remain weak, Barclays said in a note. Barclays has projected a growth rate of 6.8 percent for Q2. “We expect growth rates in Q3 (July-September) to improve in basic utility sectors (ie, mining and electricity generation), as well as in manufacturing, construction and public spending. These will likely help mitigate the loss of momentum in financial services and trade & transport. Export growth is likely to stay weak, but the overall impact of sustained improvement in services exports, coupled with lower imports, implies that the contribution of net exports to GDP was a much smaller drag in Q3 (July-September) than it has been in the preceding quarters,” Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said.

Government expenditure – Centre and states, has supported capex cycle recovery. “The combination of government capex and strong growth in real estate services has supported the construction sector with pick-up in steel consumption and cement production,” IDFC FIRST Bank’s Economist Gaura Sen Gupta said in a note. IDFC FIRST Bank has projected Q2 growth rate to be 6.7 percent.

As per latest data from the Controller General of Accounts (CGA), the government spent Rs 1.16 lakh crore as capital expenditure, which is about 49 percent of its full-year Budget target. “The aggregate capital outlay and net lending of 25 state governments, for which the CAG data is available, rose to Rs 1.7 lakh crore in Q2 from Rs. 1.2 lakh crore in Q1; although the pace of year-on-year expansion halved to 33.5 percent from 75.0 percent, respectively. It remained robust, benefitting from an early transfer of funds under the interest-free capex loan scheme and front-loaded tax devolution,” ICRA’s Chief Economist Aditi Nayar said.

Sectoral trends

In terms of the sectoral breakdown, services are expected to be the largest contributor to growth despite slower expected growth in the financial services and ‘trade hotels and transport’ categories, economists said.

“Agriculture might be a slight dampener but services have revived much stronger than expected. In totality, services have performed better than the manufacturing sector. Government-led capex has also been strong even though there are questions about it being sustainable. These along with high-end consumption seems to have contributed to growth,” Devendra Kumar Pant, Chief Economist, India Ratings and Research said. India Ratings and Research has projected growth to be at 6.9 percent in the July-September quarter.

ICRA, which estimates Q2 GDP growth at 7 percent, estimates the services gross value added (GVA) growth to moderate to 8.2 percent in Q2 from 10.3 percent in Q1 on a normalising base, while the growth in agriculture, forestry, and fishing is expected to dip sharply to a muted 1.0 percent in Q2 FY2024 (Q2 FY2023: 2.5 percent) from 3.5 percent in Q1, owing to the decline in output across all kharif crops projected by the First Advance Estimates.

State Bank of India (SBI) Research, which expects Q2 GDP growth at 7 percent, said domestic economic activity is being supported by robust agricultural performance, sustained buoyancy in services, the boost to investment from the government’s thrust on capital expenditure, above trend capacity utilisation in manufacturing, double digit credit growth, and healthier corporate and bank balance sheets. Slowing global growth, the drag from exports, geopolitical risks and volatile global financial conditions, however, weigh heavily on the outlook, it said.

Growth outlook for rest of the year

Going ahead, input cost pressures and waning of the base effect may result in slower growth rate and hence, the overall growth forecast for financial year 2023-24 is being seen around 6.2-6.7 percent. Both the government and the Reserve Bank of India (RBI) have forecast a growth rate of 6.5 percent each for the financial year 2023-24.

Concerns on global growth remain, which in turn are likely to impact export demand. “With a palpable slowdown of major economies globally, export competitiveness seems to have hit a temporary roadblock. However, the growing commitment of global behemoths to incrementally source components and parts, apart from local manufacturing commitments aimed at exports, augurs well for the sector in times ahead,” the SBI report said.

Growth momentum is expected to moderate as companies’ profit growth slows. “The strong growth in H1 profits (services and manufacturing) is due to reduction in input cost pressures, which has countered slowdown in sales growth. Recovery in rural demand has remained mixed due to relatively softer pace of rural wage growth and uneven monsoon. The nominal GDP print will also be under focus as deflator growth has decelerated sharply in FY24, with WPI inflation in negative territory. For now, FY24 nominal GDP growth is tracking at sub-9%, weaker than 10.8% pencilled in the Union Budget,” IDFC FIRST Bank said.

Growth may also slow down in the second half of the financial year ahead of the elections as the impact of slowing capex and tempering of demand because of monetary tightening shows through in full, ICRA said. “Looking ahead, uneven rainfall, narrowing differentials with year-ago commodity prices, the possible slowdown in momentum of government capex as we approach the Parliamentary Elections, weak external demand and the cumulative impact of monetary tightening are likely to translate into lower GDP growth in H2 FY2024. As a result, we maintain our FY2024 GDP growth estimate at 6.0 percent, lower than the MPC’s projection of 6.5 percent for the fiscal,” Nayar said.