GDP: India's Economy Grows Faster Than Expected, But Will Growth Moderate Below 7% After Q2?

India's economy has taken the lead in the fastest-growing economy in the world, thanks to the latest Q2 GDP rate which was better-than-expected, beating all consensus. India's GDP growth is at 7.6% by the end of the September 2023 quarter, driven by robust growth in mining and manufacturing activities. However, in the second half of FY24, the GDP rate is likely to moderate below 7% with agriculture and rural demand being a spoilsport. Nevertheless, after the latest print, ICRA has raised its GDP forecast for FY24 by 0.2% to 6.2% from earlier 6%.

The country's real GDP growth comes to around 7.6% in the second quarter of FY24, stronger than the street's estimates of 6.8%. The latest economic print also surpassed RBI's Q2 target of 6.5% for the second consecutive quarter. Meanwhile, gross value added (GVA) witnessed a growth of 7.4%. However, the latest GDP and GVA data is slightly slower than compared to 7.8% each in Q1FY24.

Talking about the latest performance, Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers said, "India's GDP growth for the quarter ending September 2023 has exceeded both our and consensus expectations. On the supply side, industrial activity has been the biggest surprise, while on the demand side, investment and government final consumption have surprised pleasantly. At the same time, the supply-side services sector and demand-side private final consumption performed worse than predicted. Agriculture was likewise a let-down."

Also, Shlok Srivastav, Co-founder & COO, of Appreciate said, "At 7.6%, India's Q2 GDP growth beats street estimates. In line with the trend witnessed at the time of IIP's data release in September 2023, the GDP growth of the mining and manufacturing industry has also seen an uptrend of nearly double growth."

Srivastav added data released by the Indian Bureau of Mines in July 2023 showcased India's significant surge (10.7% compared to the same month the previous year) in the mineral production sector. Plus, with crude oil prices falling and India's natural gas production surging 9.3% Y-o-Y in October 2023, the growth in mining appears to complement the overall sentiment.

Further, in detail, Aditi Nayar, Chief Economist, Head - Research and Outreach, ICRA explained that the YoY growth in India's GDP underwent a mild sequential easing to 7.6% in Q2 FY2024 from 7.8% in Q1 FY2024, considerably surpassing our (7.0%) and the consensus estimate for the quarter.

Nayar highlighted that the surprise was largely led by the manufacturing sector, with growth surging to a nine-quarter high of 13.9% in Q2 from 4.7% in Q1, led by a favourable base, an uptick in volume growth and an improvement in profit margins owing to continued deflation in input prices. The growth in the construction sector also surprised on the upside, even as the mining and electricity, gas, water supply and other utility services witnessed a double-digit expansion in the quarter, along expected lines, amid a similar growth in volumes of these segments, as reflected in the IIP data. To the extent that the YoY decline in commodity prices and a longer dry spell boosted GVA growth, the better-than-expected performance of manufacturing and construction may not be sustained in H2 FY2024.

She further said, "The stronger-than-anticipated industrial performance offset the steep deceleration in the services sector as well as the expectedly muted performance in agriculture, accounting for as much as 52% of GVA growth in Q2 FY2024. Within services, the THTCS segment witnessed an expansion over the pre-COVID levels of FY2020 in Q2 after ruling below the same in Q1 FY2024."

On the expenditure side, Nayar added, "While GFCF and GFCE witnessed an uptick in growth to double digits in Q2 FY2024, export growth turned positive in the quarter, thereby pushing up GDP growth. However, PFCE growth halved to 3.1% from 6.0% in Q1, partly reflecting the weakness in rural demand." Also, notably, the investment rate, measured as the nominal GFCF-to-GDP, inched up to 30.0% in Q2 FY2024 from 29.1% in the year-ago quarter. This was the highest investment rate in any Q2 since Q2 FY2015.

The majority of these experts believe GDP growth will slow down in the H2 of the current fiscal.

Looking ahead, Nayar said, "We project GDP growth to moderate significantly in H2 FY2024, with the continuing headwinds such as the normalising base, weak outlook for agri output and rural demand, tepid global growth, narrowing differentials in commodity prices and transmission of past monetary tightening. Additionally, the possible slowdown in the momentum of Government capex as we approach the Parliamentary Elections could constrain growth outcomes. Given the higher than forecast outcome for Q2, we are revising our FY2024 growth forecast to 6.2% from 6.0%."

However, Hajra also said, "While we expect growth to moderate in the second half of the current fiscal year, we now estimate full-year growth to be at least 20 basis points better than our previous forecast of 6.2%. Rapidly falling inflation combined with faster-than-expected growth is good news for financial markets, notably equity markets. India remains the world's fastest-growing major economy."

Additionally, Srivastav said, the effect of poor agri performance and the underperformance of the service industry remains to be seen in the second half of the financial year."

In regards to the stock market, Raghvendra Nath, MD, Ladderup Wealth Management said, "India continues to remain the fastest growing major economy in the world. With the robust growth reported in India along with China still in a troubled situation, we can expect healthy inflows in Indian equity markets, with NIFTY being pushed to new highs."

RBI expects GDP growth to moderate after Q2FY24 as well. For the third and fourth quarters, the central bank expects GDP to come to 6% and 5.7% respectively. For overall FY24, RBI expects GDP growth to be at broadly 6.5%.

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