Ahead of GDP data release today, growth trends, outlook

Source: The post is based on the article “Ahead of GDP data release today, growth trends, outlook” published in The Indian Express on 31^st August 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: About GDP forecast of the first quarter for FY 2023-24

News: The National Statistical Office (NSO) will release the official GDP data for April-June (Q1) on Thursday evening.

What are the expected growth forecasts for the first quarter of FY 2023-24?

India’s Q1 GDP is likely to increase due to increased government spending, services sector growth, and a favorable base, with estimated growth of 7.7-8.5%.

However, growth is also predicted to slow in subsequent quarters due to factors like El Nino’s impact on monsoon, mining output decline, weak exports, and potential government capex slowdown.

Further, the RBI revised GDP growth forecast for Q1 FY24 to 8% from 6%, following higher-than-expected growth in Q4 FY23. Most economists also forecast higher GDP growth of 7.7-8.5%. RBI expects full year (FY24) growth at 6.5%.

Several agencies project India’s Q1 FY24 GDP growth at 7.7-8.5%, led by ICRA’s 8.5% and SBI Research’s 8.3%.

What are the reasons behind this growth?

This growth is being driven by service demand recovery and increased investment, especially in government capital expenditure.

In Q1 FY24, capital expenditure surged, with the central government spending 27.8% of its budget and states spending 12.7% of their budget.

Andhra Pradesh, Telangana, and Madhya Pradesh recorded notable capital expenditure growth, reaching up to 41%.

What are the predictions for growth in different sectors?

Banking: Incremental deposits have nearly doubled, and credit demand rose despite rising interest rates. Both public and private sector banks are expected to show similar loan growth in Q1 FY24. PSBs’ performance has also improved significantly.

Construction: The construction sector is likely to achieve its second consecutive double-digit growth in the April-June GDP data, due to the substantial government capital spending and increased corporate investments.

Mining and Export: Growth could be constrained by mining and export challenges due to external factors and lower demand during post-lockdown reopening.

Hence, this steady growth trajectory should allow the Reserve Bank of India (RBI) to maintain a prolonged pause on interest rates.

What is the way ahead?

First, the Indian economy is expected to slow down in the second half of the current fiscal year.

Factors like uncertain monsoon, lower export demand, fading favorable comparisons, reduced commodity price differences compared to last year. Potential election-related decrease in government spending could contribute to this slowdown.

Therefore, the overall GDP growth estimate for the fiscal year 2024 remains at 6.0%, below the Monetary Policy Committee’s forecast of 6.5%.

Second, industrial performance ahead could be shaped by two key factors:

1. A potential global economic slowdown or recession due to increasing interest rates, possibly affecting exports negatively.
2. The importance of the monsoon’s performance, impacting inflation and rural demand, and subsequently influencing industrial outlook.

The RBI also acknowledged challenges in its recent monetary policy review, citing risks from weak global demand, financial market volatility, geopolitical tensions, and economic fragmentation.