India’s Q2 GDP growth beats estimates at 7.6%

India's economy grew 7.6% in Q2, exceeding expectations due to higher government spending and strong performance in manufacturing and construction.

India’s economy grew 7.6% in the second quarter (July-September) of the year, exceeding analyst expectations comfortably on the back of higher government spending and a strong performance by the manufacturing and construction sectors. The number means India’s economy has expanded at 7.7% in the first half of the year.

India’s Q2 GDP growth beats estimates at 7.6%

“The GDP growth numbers for Q2 display the resilience and strength of the Indian economy in the midst of such testing times globally. We are committed to ensuring fast paced growth to create more opportunities, rapid eradication of poverty and improving “Ease of Living” for our people,” Prime Minister Narendra Modi said on X.

Analysts said the only question now, as far as the economy is concerned, is whether economic momentum has already peaked or will continue in the second half of the fiscal year?

While independent experts tend to converge on the former, the government is buoyant about the economy’s prospects for the rest of the year as well, which will end just before the 2024 general elections. To be sure, some of the momentum in the GDP numbers could be on account of technical factors such as a favourable inflation adjustment. However, the fact remains that the numbers are in line with broadly favourable message from other high frequency indicators.

The latest GDP data has surpassed the projections by the Reserve Bank of India’s Monetary Policy Committee, which had projected a 6.5% GDP growth in 2023-24, with quarterly growth numbers of 6.5%, 6% and 5.7% in the quarters ending September 2023, December 2023 and March 2024. It is worth reiterating that MPC had overestimated June quarter’s GDP growth by 20 basis points in its August resolution.

What explains the unexpected economic performance in the latest GDP numbers?

It is useful to begin with what does not. Private Final Consumption Expenditure (PFCE) grew at a tepid 3.1%, almost halving from its June quarter growth of 6%. This suggests that mass demand continues to be weak. PFCE accounts for more than half of GDP in India. Service sector growth also fell sharply between the June and September quarters from 10.3% to 5.8%. Even agriculture has seen a loss in economic momentum from 3.5% to 1.2%. What has really made a difference in the September quarter is a double-digit growth in industry, where manufacturing and construction have clocked growth rates of 13.9% and 13.3%. On the expenditure side, government final consumption expenditure (GFCE) and gross fixed capital formation (GFCF) 12.3% and 11% respectively.

While manufacturing numbers have been helped by a favourable base effect – there was a 3.8% contraction in the quarter ending September 2022 – construction sector had seen a healthy growth 5.7% even in September 2022. To be sure, some of the momentum in industry could be on account of favourable indexation. In all sub-sectors of industry except mining, real growth rate is actually higher than the nominal growth rate, which suggests that the contraction in wholesale price index during this period could have given a boost to the real growth numbers. Having said that, it needs to be added that the overall difference between real and nominal GDP growth rate has increased from 20 basis points in the June quarter to 150 basis points in the September quarter. Also, the Index of Industrial Production (IIP) shows a growth of 7.4% in the September quarter compared to 4.8% in the June quarter.

“The buoyant growth is being underpinned by cyclical factors like robust corporate profits, a strong fiscal impulse, with government spending being front-loaded in a pre-election year, and a boisterous financial sector, led by easier lending standards and higher credit growth. The structural factors like deflator issues in growth accounting may have also augured well for the print. However, we expect GDP growth to slow in 2HFY24”, Madhavi Arora, lead economist at Emkay Global Financial Services said in a note. “Cyclical headwinds in the form of relatively slower government spending in second half, fading benefits of lower commodity prices on year-on-year basis, sub-par agricultural performance, tighter lending standards and weaker exports” and unwinding of deflator related growth boost seen in the first half of FY24 will add to the loss of growth momentum, the note added.

“Considering today’s much higher-than-expected Q3 print and continued buoyancy in high frequency indicators in current quarter, we raise our FY23-24 GDP growth forecast to 6.7% (earlier: 6.3%). Today’s print should provide further room for the MPC to keep rates unchanged next week, as growth is unlikely to be to be a major concern for the central bank. We expect the RBI to remain on hold throughout the rest of FY23-24,” said Rahul Bajoria, head of EM Asia (ex-China) Economics Research, Barclays.

Chief economic adviser (CEA) V Anantha Nageswaran said the growth prospects of the Indian economy “appear bright” even as external factors pose a downside risk. He, however, said the growth momentum of the Indian economy will continue on government’s infrastructure spending, expansion of public digital platforms and path-breaking measures such as PM GatiShakti, the National Logistics Policy, and the Production-Linked Incentive (PLI) schemes to boost manufacturing output. “Investment and consumer momentum will underpin solid growth prospects over the upcoming year,” he said.