GDP uplift: Manufacturing, construction, base effect seen to boost growth to 8.4% in Q3

The economy is seen to grow at a higher than estimated 7.6% this fiscal, with GDP growth in the third quarter of the fiscal at 8.4%, on the back of a lower base, tax collections, and healthy growth in the manufacturing sector, and construction activities.

Data released by the National Statistical Office on Thursday revealed that the economy is expected to grow by 7.6% in 2023-24 according to the second advance estimates as against the first advance estimate of 7.3%. The data also pegged GDP growth in the third quarter of the fiscal at 8.4% and revised upwards the growth projection for the first and second quarters to 8.2% and 8.1% respectively. Significantly, it also revised GDP growth projection for 2022-23 to 7% from the earlier estimate of 7.2%. GDP growth in 2021-22 has been revised upwards to 9.7%.

Apart from agriculture, which is projected to contract by 0.8% in the October to December 2023 quarter and grow by 0.7% in the full fiscal, all other sectors are seen to post robust growth. The manufacturing sector is projected to grow by 8.5% this fiscal and by 11.5% in the third quarter. Construction is projected to grow by 10.7% this fiscal.

Madan Sabnavis, chief economist, Bank of Baroda noted that a big boost has come from construction which has been supported all through by high thrust on roads and housing. He also highlighted the sharp rise in the gross fixed capital formation rate to 31.3% from 30.7%. “This can be attributed more to government capex, roads, housing as there is less anecdotal evidence of private sector picking up sharply,” he said.

While the headline numbers indicate robust economic growth, the sailing may not be as smooth given the sharp slowdown in farm sector growth along with a contraction in the third quarter of the fiscal.

However, Chief Economic Advisor V Anantha Nageswaran said that rabi sowing has been quite good compared to last year and a normal monsoon is expected. “Agriculture harvest, farm income, and rural income are expected to do better in 2024-25,” he said. He also cited household consumption expenditure survey results to highlight that rural spending has risen.

“Improvement in household consumption, bright prospects for capital formation, owing to an upturn in private capex cycle, improved business sentiments, healthy balance-sheets of banks and corporate and the government’s continued thrust on capital expenditure to drive growth,” he said.

“Overall, we have confidence in the economy,” he underlined while declining to give any projection on economic growth in the fourth quarter of the fiscal.  Going by the estimates, GDP growth in the January to March 2024 quarter could slow down to less than 6%.

Sunil Kumar Sinha (Senior Director & Principal Economist) & Paras Jasrai, Senior Analyst at India Ratings and Research, said that the ongoing growth momentum is indicative of the Indian economy’s resilience notwithstanding global headwinds.

“However, there are risks as well. The aggregate demand is largely driven by the government capex.  Prevailing consumption demand is highly skewed in favour of goods and services consumed by the households belonging to the upper 50% of the income bracket and therefore not broad-based… And finally, tighter financial conditions and lower/uneven 2024 monsoon rainfall could act as constraints for GDP growth going forward,” they said.

Analysts also underlined the sharp divergence in the GDP and gross value-added growth in the third quarter of the fiscal. GVA growth in the third quarter of the fiscal was 6.5%.

“The Q3 data on India's growth threw up a divergent trend, with the GVA growth moderating broadly on expected lines to 6.5%, and the GDP expanding by a much higher than anticipated 8.4%. This wide gap followed from a surge in the growth of net indirect taxes to a six-quarter high 32% in this quarter, which is unlikely to be sustainable. In our view, it may be more appropriate to look at the trend in the GVA growth to understand the underlying momentum of economic activity,” said Aditi Nayar,  Chief Economist, Head of Research and Outreach, ICRA.

Another area of concern remains consumption growth, which has remained modest. The share of private final consumption expenditure in GDP is seen to have dropped marginally to 60.3% in FY24 from 60.6% in FY23. Consumption to GDP ratio has slowed down marginally this year by 0.6% which can be the inflation impact, Sabnavis noted.

“Consumption growth has remained feeble. Going forward, the most critical aspect to watch out for will be a broad-based improvement in consumption growth. The other critical aspect would be a meaningful improvement in private investment. Overall robust GDP growth will be sustainable only when there is a meaningful improvement in consumption and private investment,” said Rajani Sinha, Chief Economist, CareEdge Ratings.

Private final consumption expenditure is expected to grow at 3% as against the first advance estimate of 4.4%, while gross fixed capital expenditure is expected to expand by 10.2% versus the first advance estimate of 10.3%.