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India's economic performance in the September quarter of FY24, marked by a slower-than-anticipated GDP growth of 5.4 percent, has sparked a reassessment of economic forecasts for the fiscal year. This figure, representing the expenditure or demand side of the economy, falls short of the previous quarter's 6.7 percent and the 8.1 percent recorded in the same quarter of the previous year. The gross value added (GVA), reflecting the production side, also shows a slowdown, reaching 5.6 percent. This deceleration, observed for two consecutive quarters, signifies a notable economic slowdown, demanding closer scrutiny. Three key trends emerge from a detailed analysis of the GDP data.
The first trend highlights the normalizing gap between GVA and GDP growth rates. For two consecutive quarters, these rates have converged, indicating a narrowing of the historical disparity between them. This suggests that the impact of tax collections and subsidy disbursements during and after the pandemic is finally stabilizing. The gap, which widened to 1.8 percentage points between June 2023 and March 2024, is now significantly reduced. This normalization is a positive sign indicating a return to more predictable economic patterns.
Secondly, investment growth has experienced a considerable slowdown. In the September quarter, it reached 5.4 percent, down from 7.5 percent in the preceding quarter and a significant drop from 11.6 percent in the same quarter of the previous year. This slowdown can be attributed to two factors: a high base effect from the previous year's robust investment activity and a weaker fiscal impulse due to lower government capital expenditure (CAPEX). The reduced government CAPEX, announced in the Union Budget, reflects a strategy of fiscal consolidation, allowing for increased government consumption spending to support job creation. This is a deliberate policy choice to prioritize sustainable long-term growth and fiscal stability.
Thirdly, private consumption is emerging as a key driver of economic growth, potentially overshadowing investment's role. In the September quarter, private consumption growth surpassed investment growth, reaching 6 percent. While urban demand shows signs of weakening, robust rural demand appears to be fueling this consumption surge. The agriculture and allied sector achieved its fastest growth in five quarters, at 3.5 percent, signaling an improvement in rural incomes. This improvement, coupled with a low base from the previous year, contributes significantly to the rise in private consumption. Furthermore, increased government consumption spending appears to be positively impacting private consumption, acting as a short-term multiplier effect.
Analysis of 13 years of national accounts data reveals a correlation between government consumption spending and private consumption. Years with slower government consumption spending often corresponded with dips in private consumption. Last fiscal year, government consumption spending decreased to 2.5 percent from 9 percent in fiscal year 2023. This slowdown, alongside weaker rural incomes and high food inflation, likely contributed to the private consumption slowdown. However, the current year’s budget has addressed this by increasing the outlay on schemes focused on rural development – including infrastructure, housing, and employment guarantee programs – by approximately 21 percent. This increase aims to support rural incomes and subsequently bolster private consumption. The September quarter saw government consumption spending rebound to 4.4 percent after a decline in the June quarter, while the construction sector experienced robust growth of 7.7 percent, further supporting this analysis.
The revival of consumption hinges on three factors: higher government spending, improved agricultural performance leading to increased incomes, and lower food inflation. The first two factors have shown positive momentum, while food inflation remains a concern. Despite the increased food inflation, the income effect appears to be currently dominating, driving private consumption growth. For the remainder of the fiscal year, private consumption is expected to be a major driver of economic growth. The festive season and wedding season in the third quarter are expected to contribute positively to growth. However, persistent weakness in urban demand requires attention. The Reserve Bank of India's (RBI) Consumer Confidence Index indicates sluggish urban demand, potentially linked to high interest rates, cautious bank lending, and slower retail credit growth.
The RBI's November bulletin points to stress in small-ticket advances, credit cards, and personal loans among some private banks, indicating a rise in over-leveraged clients and increased provisioning. This cautious lending approach by banks contributes to the slowdown in urban consumption. Overall, GDP growth is projected to slow to 6.8 percent this fiscal year from 8.2 percent last year, primarily due to high interest rates and a low fiscal impulse. Risks remain tilted to the downside given the lackluster second-quarter growth. Consumer price inflation is expected to decline to 4.6 percent this fiscal year from 5.4 percent last year, with the Monetary Policy Committee expected to maintain a status quo on interest rates in December before potentially cutting rates towards the end of the fiscal year. However, the rigidity in vegetable prices and firming global edible oil prices pose risks to this forecast. The interplay between government policy, consumption patterns, and inflation will continue to shape India’s economic trajectory in the coming quarters.
Source: GDP growth and inflation will trend downwards in FY25