GDP growth in March quarter likely to slow on sluggish services, factory output; mild uptick likely after elections on inflationary surge

Slower growth estimate

Agricultural Gross Value Added (GVA) is expected to contract for the second straight quarter in Q4 FY24 at around (-)0.5 per cent compared with (-)0.8 per cent in Q3 amid weak trends in the rabi output (barring wheat) and concerns related to yields, ICRA said. GVA reflects national income from the output side and GDP is arrived at by adding product taxes and subtracting subsidies to the GVA.

ICRA has projected the GDP growth to moderate to a four-quarter low 6.7 per cent in Q4 FY24 from 8.4 per cent in Q3. “Lower volume growth coupled with diminishing gains from commodity prices dampening the profitability of some of the industrial sectors is expected to dampen India’s GVA growth in Q4 FY2024,” Aditi Nayar, Chief Economist, ICRA said.

HDFC Treasury Research expects Q4 GDP to be 6.5 per cent amid moderation in manufacturing and services growth. For the full year FY24, it expects GDP to grow by 7.8 per cent higher than the second advance estimate of 7.6 per cent, it said.

“Manufacturing sector is expected to be the key growth driver within the industrial sector…agriculture sector is expected to showcase a marginal contraction in 4OFY24. Services sector has shown stable and sustained growth as indicated by various high frequency indicators. On the demand side the growth in consumption demand would be lower than the GDP growth due to a drag in the consumer/non-durable goods,” Paras Jasrai, Senior Analyst, India Ratings said.

Impact of elections

The impact of Lok Sabha elections also seems to have impacted growth. DBS Group Research in a note pointed out that growth, on average, slows a quarter before the elections but rises subsequently, by an average of around 60-100 basis points, and inflation tends to pick up post elections. DBS expects real GDP growth at 7 per cent in Q4, taking the full year FY24 growth closer towards 8 per cent.

Manufacturing sector growth is likely to be subdued with decline in net profit growth of non-financial listed companies, after rising for four consecutive quarters, IDFC FIRST Bank said. However, rural consumption likely improved in Q4FY24, after remaining subdued for the majority of FY24, with FMCG sales growth (volume) having shown an improvement in rural areas in Q4 FY24, it said.

On the capex front, while the government’s capital expenditure grew by 31.6 per cent year-on-year to Rs 1.3 lakh crore in January-February 2024, it may have eased in March 2024 on a Y-o-Y basis amidst the Model Code of Conduct. “Capex cycle remains supported by Central government capital expenditure (36.5 per cent in FY24 till date v/s 24.4 per cent in FY23 till date) and state government capital expenditure (21.5 per cent in FY24 v/s 17.1 per cent in FY23). Construction sector, which has been supported by government capital expenditure, is showing some signs of moderation with a slowdown in steel consumption (10.7 per cent YoY in Q4 v/s 14.5 per cent in Q3). That said, cement production growth, which had slowed in Q3, picked-up in Q4 (8.5 per cent in Q4 v/s 5.1 per cent in Q3),” Gaura Sen Gupta, Chief Economist, IDFC FIRST Bank said.

Private final consumption expenditure is estimated to have slowed to 3 per cent in FY24.”A slower growth in consumption will require upcoming policies to be demand- focused rather than only supply-driven, leaving the door open to directed support towards the urban poor and unorganised sector players,” DBS said.

Growth upside

Some economists are of the view that Q4 GDP will throw a surprise on the upside as had happened during Q3 GDP estimates. However, GVA growth would be on the lower side. India’s GDP growth had surged to a six-quarter high of 8.4 per cent in October-December as against many economists expecting growth to slow down to about 6.5 per cent from the previous quarters, prompting many to point towards GVA growth data for a more realistic picture.

“We are likely to see the repeat of Q3 FY24’s big upside surprise in GDP growth and high wedge between GDP and GVA growth in Q4 as well. While the implied GDP and GVA growth for Q4 FY24 (if one goes by NSO estimates for FY24) is 5.9 per cent and 5.4 per cent, respectively, the implied net indirect taxes growth is estimated at around 9-10 per cent. However, the fiscal data for the Centre and states so far reveals that subsidies/net indirect taxes are again tracking much lower than the previous year which could artificially push the Q4 FY24 GDP print to near 6.9-7.0 per cent even as GVA growth may still stay shy of 6 per cent,” Madhavi Arora, Lead Economist, Emkay Global Financial Services said.

Deutsche Bank, which is estimating the highest growth rate for Q4 at 7.3 per cent, said most high-frequency indicators are pointing towards a higher growth rate. “We are forecasting Jan-March ’24 real GDP to have grown 7.3 per cent YoY during the quarter, which is higher than what we had previously anticipated. DB’s India Macroeconomic Momentum Indicator (IMMI), which is a composite index of 5 high-frequency growth indicators – industrial production, exports, non-oil-non-gold imports, bank credit and consumer goods – tracks quarterly GDP growth quite well in advance and is indicating 7.0%+ growth during Jan-March ’24…we are forecasting real GVA growth at 6.5%yoy for Jan-March ’24, 90 bps lower than our GDP estimate,” said Kaushik Das, chief economist, India & South Asia, Deutsche Bank.