ICRA Expects India's GDP Growth At 7% In Q2FY24, Surpassing RBI's Estimates

Leading rating agency, ICRA projects India's GDP growth at 7% for the second quarter of FY24, which higher than RBI's October policy projection of 6.5%. However, sequentially, GDP growth will moderate compared to 7.8% print in Q1 of FY24. In the second half of the fiscal, ICRA expects lower GDP growth and hence it has maintained its target of 6% for the entire financial year compared to RBI's estimate of 6.5%.

Further, ICRA expects GVA growth to ease to 6.8% in Q2 FY2024 from 7.8% in Q1 FY2024, driven by the services sector (to +8.2% from +10.3%) and agriculture (to +1.0% from +3.5%), amidst an improvement in industry (to +6.6% from +5.5%).

Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA Ltd said: "A normalising base and an erratic monsoon are expected to result in a sequential moderation in the GDP growth to 7.0% in Q2 FY2024 from 7.8% in Q1 FY2024. Regardless, we anticipate that the GDP expansion in this quarter will exceed the Monetary Policy Committee's (MPC's) October 2023 projection of 6.5%."

She added, "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%, lower than the MPC's projection of 6.5% for the fiscal."

In its statement on Tuesday, ICRA highlighted that India's investment activity was quite robust in Q2 FY2024. The YoY growth performance of seven of the 11 investment-related indicators improved in Q2 FY2024 relative to Q1 FY2024. While the YoY growth in the remaining four indicators weakened in Q2 FY2024 relative to Q1, all of them witnessed a double-digit expansion in the quarter, including the CV registrations (+13.5%), cement production (+10.2%), the states' capital outlay and net lending (+33.5%), and the Government of India's (GoI's) capex (+26.4%).

Also, the aggregate capital outlay and net lending of 25 state governments, for which the CAG data is available, rose to Rs. 1.7 trillion in Q2 FY2024 from Rs. 1.2 trillion in Q1 FY2024; although the pace of YoY expansion halved to 33.5% from 75.0%, respectively, it remained robust, benefitting from an early transfer of funds under the interest-free capex loan scheme and front-loaded tax devolution. While the GoI's gross capital expenditure rose by 26.4% YoY to Rs. 2.1 trillion in Q2 FY2024, it trailed the Rs. 2.8 trillion seen in Q1 FY2024 (YoY: +59.1%), amidst the monsoons.

The rating agency estimates the industrial GVA growth to have risen to 6.6% in Q2 FY2024 from 5.5% in Q1 FY2024, boosted by manufacturing, electricity, and mining. ICRA projects manufacturing GVA growth to witness an uptick to 5.5% in Q2 FY2024 (-3.8% in Q2 FY2023) from 4.7% in Q1 FY2024 (+6.1% in Q1 FY2023), benefitting from higher volumes and continuing albeit slower tailwinds from commodity prices.

Moreover, it added that electricity generation witnessed a double-digit expansion of 11.1% on a YoY basis in Q2 FY2024 (+1.3% in Q1 FY2024), benefitting from the surge in electricity demand (to a five-quarter high +11.7% from +0.7%; as per POSOCO data) owing to a sub-par monsoon rainfall.

Further, ICRA said, high frequency data suggests that the momentum of construction activity remained healthy in Q2 FY2024, with the sub-par rainfall resulting in relatively lower disruptions in the quarter vis-à-vis what was typically seen in the past. However, with a slowdown in national highway construction, the GVA growth of this sub-sector is likely to have eased to 7.0% in Q2 FY2024 from 7.9% in Q1 FY2024.

Lastly, ICRA estimates the services GVA YoY growth to moderate to 8.2% in Q2 FY2024 from 10.3% in Q1 FY2024 on a normalising base. Owing to the decline in output across all kharif crops projected by the First Advance Estimates, ICRA projects the growth in agriculture, forestry, and fishing to dip sharply to a muted 1.0% in Q2 FY2024 (Q2 FY2023: +2.5%) from 3.5% in Q1 FY2024 (Q1 FY2023: +2.4%). This would be the lowest growth print for the sector since Q4 FY2019 (-0.9%).