Ahead of GDP data release today, growth trends, outlook

The official GDP data for April-June (Q1) 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.

Recent GDP trend

Growth in this quarter was earlier expected to be only marginally higher than in the previous quarter. The Reserve Bank of India’s (RBI) Q1 GDP estimates have varied from 6.7% (given in August 2022) to 7.2% (September 2022) to 7.1% (December 2022) to 7.8% (February and April 2023), and finally 8% (June and August 2023).

GDP growth clocked a higher-than-expected rate of 6.1% in January-March (Q4 of FY23), which pushed up the growth estimate for the full year 2022-23 to 7.2%. In April-June 2022, GDP growth stood at 13.1% as the base normalised after the Covid-19 pandemic.

Most economists have now projected higher GDP growth estimates for the April-June quarter than the RBI, which has estimated the Q1 FY2023-24 real GDP growth at 8%, and the full year’s (FY24) growth at 6.5%.

Estimates of growth

CareEdge has estimated the Q1 FY24 GDP growth at 7.7%, while Barclays has estimated 7.8%. State Bank of India (SBI) Research and ICRA have put it at 8.3% and 8.5% respectively.

A “continued catch-up in services demand and improved investment activity”, particularly the front-loading of government capital expenditure boosted the economic activity in Q1, ICRA said. “We peg GDP growth in Q1 FY2024 at 8.5%, exceeding the [RBI] Monetary Policy Committee’s (MPC’s) forecast of 8.0%,” Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA, said.

Nayar said 11 of the 14 high-frequency indicators pertaining to the services sector recorded a year-on-year (YoY) growth in Q1 FY24, with the pace of expansion ranging from 0.3% (telephone subscribers) to 18.6% (domestic airlines passenger traffic). “In contrast, indicators such as CV sales (- 3.3%) and air cargo traffic (- 0.4%) saw a mild YoY contraction in Q1 FY2024,” she said.

SBI Research in its Ecowrap report said economic activity remained resilient, mainly driven by the services sector.

“More importantly, there has been a surge in capital expenditure in Q1, with the central government spending 27.8% of budgeted, while states at 12.7% of budgeted. States like Andhra Pradesh, Telangana, Madhya Pradesh, where elections are due have registered capital expenditure growth up to 41%,” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said in the report.

The growth in incremental deposits has almost doubled at Rs 11.3 lakh crore, compared to Rs 5.0 lakh crore last year (Rs 2.73 lakh crore received through Rs 2000 banknotes and Rs 1.5 lakh crore from HDFC merger), the report said.

Despite rising interest rates, the overall economic growth produced a higher credit demand, leading to banks reporting a robust rise in advances, it said. “Both the PSBs (public sector banks) and private sector banks logged an equal pace of loan growth during Q1FY24. All the major financial parameters viz., credit deployment, profitability, asset quality, capital adequacy etc. indicate that the performance of PSBs has significantly improved,” the report said.

Sectors, interest rates

The construction sector is expected to stand out in the April-June GDP data, as it is likely to post its second straight double-digit growth print, given front-loaded capital expenditure by both central and state governments, and a pickup in non-financial corporate investments.

“Some drag to growth is expected from weaker momentum in mining, and exports, the latter given external headwinds and ebbing reopening demand. We think robust domestic demand is anchoring economic growth, with strong momentum in areas such as construction, underpinned by government capex… This should ensure that growth remains anchored close to trend levels, giving enough room for RBI to be on a long pause (on interest rates).

“We continue to believe that the window for rate cuts is closed for now, and the RBI is likely to be on hold for the rest of the fiscal year, in our view, with only a strong growth shock likely to stir it into action,” Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said.

Projections for year

Erratic monsoon rainfall, weakening export demand, and the tapering of the favourable base effect are likely to weigh on GDP growth going forward. The adverse impact of the El Nino has become evident this month, with August set to be the driest since 1901, when rainfall records began to be maintained.

“…We are circumspect that erratic rainfall, narrowing differentials with year-ago commodity prices, and possible slowdown in momentum of Government capex as we approach the Parliamentary elections, could dampen GDP growth in H2 FY2024 (second half of the current financial year) below the MPC’s forecasts. Overall, we maintain our FY2024 GDP growth estimate at 6.0%, lower than the MPC’s projection of 6.5% for the fiscal,” Nayar said.

Two factors could affect the direction of industrial performance in the coming months — first, a global economic slowdown, if not a recession, under the weight of rising interest rates, which could drag down exports, and second, the monsoon, the performance of which will critically influence industrial prospects through impact on inflation and rural demand, CRISIL Market Intelligence & Analytics said in a note. It expects GDP to grow 6.0% this fiscal compared with 7.2% the previous fiscal.

The RBI in its monetary policy review earlier this month said that headwinds from weak global demand, volatility in global financial markets, geopolitical tensions, and geoeconomic fragmentation pose risks to the outlook.

“Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5% with Q1 at 8.0%; Q2 at 6.5%; Q3 at 6.0%; and Q4 at 5.7%, with risks broadly balanced. Real GDP growth for Q1:2024-25 is projected at 6.6%,” it said.