Private consumption, capital formation help India ensure robust GDP growth of 7.8% in Q1FY24

A step up in private final consumption expenditure as well as robust growth in gross fixed capital formation, which is seen as an indicator of investments, helped India's economy clock 7.8% growth in the first quarter of FY24.

According to official data released on Thursday, private final consumption expenditure grew by 6% in the quarter ended June 30 while gross fixed capital formation increased by 8% year on year in the first quarter of the fiscal.

“Investment and consumer momentum will underpin solid growth prospects over the upcoming year,” said V. Anantha Nageswaran, chief economic adviser, adding that the government and Reserve Bank of India are comfortable holding on to the 6.5% GDP growth forecast for the fiscal.

While the pace in capital formation slowed down as compared to previous quarters, economists noted that it was heartening.

Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd said, “Encouragingly, PFCE growth witnessed an uptick to 6% in the first quarter of the fiscal after a subdued performance in the second half of last fiscal.” She also highlighted that gross fixed capital formation grew at a robust pace of 8%, notwithstanding the deceleration vis-à-vis the fourth quarter of last fiscal, with the GFCF to GDP ratio (in nominal terms) rising to 29.3% in Q1 FY2024 from 29.1% in the year ago period.

Private final consumption expenditure grew by a muted 2.8% in the fourth quarter of the last fiscal although gross fixed capital formation grew by a rapid 8.9% in the fourth quarter of the last fiscal.

Madan Sabnavis, Chief Economist, Bank of Baroda also noted that capital formation has been maintained in nominal terms at 29.3% which is a good sign though is mainly due to government spending. He however, pointed out that in real terms the structure of demand is interesting. “Consumption and government spending shares have fallen while capital formation is unchanged,” he said, adding that the share of discrepancies is high at 2.8%.

Step up in capex

The Centre has prioritised capital expenditure since last fiscal as a means to revive and sustain economic growth. This is also reflected the monthly accounts data released by the Controller General of Accounts on Thursday, which revealed that the Centre’s capital expenditure rose to 31.7% of the Budgeted Rs 10 lakh crore for the fiscal by July end this year. In absolute terms, capital expenditure was Rs 3,17,079 crore in the first four months of the fiscal as against Rs 2,08,670 crore in the same period a year ago.

However, the momentum in capital expenditure is unlikely to continue down the months with expectations that it will slow down by the year end ahead of the General Elections in 2024.

“Frontloading of government capital expenditure has supported investment demand so far. However, amid evolving conditions, private capex will have to match up the pace to sustain growth momentum,” said Rajani Sinha, Chief Economist, CareEdge.

Exports, government consumption contract

The data however, revealed that government final consumption expenditure (GFCE) contracted in the first quarter of the fiscal by 0.7% as against a low single digit growth of 2.3% in the fourth quarter of the fiscal. Worryingly, exports also contracted by 7.74% in the April to June 2023 quarter as against an 11.9% expansion in the previous quarter amidst global headwinds.

“Besides contraction in GFCE, the other discouraging feature of 1QFY24 is exports which due to global headwinds recorded a year de-growth of 7.7%,”noted India Ratings and Research economists Sunil Sinha and Paras Jasrai

“Ind-Ra had indicated earlier that the merchandise exports growth of previous quarters may not sustain in the 1QFY24,”it said while attributing the GFCE contraction to a restraint in government expenditure in the month of May and June.

Economic growth to slow down

Economists, however, cautioned that the buoyant GDP growth of the first quarter may slow down in coming quarters. Dharmakirti Joshi, Chief Economist, CRISIL said GDP growth at 7.8% in the April-June quarter was hardly a surprise. “Most indicators, particularly the government frontloading its aggressive investment target for the current fiscal, were hinting at it,” he said, adding that this is likely to be the peak growth performance for this fiscal.

Growth in the July-September quarter will be moderated by softening consumption as spiking inflation will dent discretionary-spending power, he said. CRISIL has a GDP forecast of 6% for the fiscal 2023-24.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities said, “Going forward, we need to watch for risks to the agriculture sector, sustenance of capex push from central and state governments, global demand conditions, and lagged impact of interest rate hikes.” He further noted that the agency expects this trend to continue over next couple of quarters.

Bank of Baroda expects the economy to grow by 6.3% this fiscal while ICRA has pegged it at 6%, which is lower than the Monetary Policy Committee of the RBI’s estimate of 6.5%