India GDP: Private Consumption Remains A Concern Amid Resilient Growth, Say Economists

While muted private consumption growth continues to be a concern, investment momentum is expected to persist.

<div class="paragraphs"><p>Source: Freepik&nbsp;</p></div>
Source: Freepik 

India's GDP rose better than estimated in the fourth quarter ended March, and investments continue to grow. Yet economists are concerned about a key indicator of demand—private consumption.

The Indian economy grew 6.1% in January–March, a step up from 4.5% in the previous quarter, according to the latest estimates released by the government's statistical office on Wednesday. Gross value added grew 6.5% compared with 4.7% in the previous quarter.

For the full year, GDP is estimated to have grown 7.2%, as compared with 9.1% in FY22.

Here's what economists have to say about GDP data fine print:

Worries Over Weak Private Consumption

Weaker private consumption still seems to be a cause for concern, although it does not reconcile with the robust value-added growth of consumption-led sectors like trade, hotels, transport, and communication services, Madhavi Arora, lead economist at Emkay Institutional Equities, said in a note.

"While we retain our FY24E GDP growth at 5.7%, we recognise that factors such as softer commodity prices, sustained buoyancy in service momentum, receding drag on real purchasing power given lower inflation, policy thrust to increase trend growth, and a possible delay in the global recession could lend upside risk to our sub 6% forecast," she stated.

Pick-Up In Growth Momentum

The GDP deflator, or implicit price deflator, is used to measure and adjust for inflation. From that perspective, WPI is important as it constitutes more than 60% of the weight. The moderation in both WPI and CPI inflation indicates that GDP deflator growth slowed in Q4.

The price movement in the total basket of goods and services as captured in the deflator declined to 4.1% in Q4FY23, compared to 12.9% in Q1FY23, stated a research note by SBI Research. As WPI inflation eased since October 2022, GDP deflator inflation moderated to 6.6% in Q3 from 10.3% in Q2. Overall, in FY23, GDP deflator inflation moderated to 8.2% from 8.5% in FY22.

An analysis of the GDP deflator based on components of demand shows that a large part of the gain came from price rises in the basket of goods, according to Soumya Kanti Ghosh, group chief economic adviser at SBI.

"We are now factoring in a pick up in growth momentum in FY24. We are upgrading our baseline forecast from 6.2% to 6.7%," said the note. Continuing on the path of strong activity in FY23, real GDP growth for FY24 is now projected at 6.7%, with Q1 at 7.8%, Q2 at 6.5%, Q3 at 6.3%, and Q4 at 6.2%, amid broadly balanced risks, it said.

Headwinds Persist 

While the underlying strength in investment is expected to continue into FY24, service growth could moderate on the waning of pent-up demand, stated a research note by QuantEco Research.

  • Services activity continues to outperform activity in the industrial sector, although the spread in growth between the two has moderated. While the delayed and gradual opening of contact-intensive services provided an extended runway for pent-up demand for services, the sharp decline in manufacturing input inflation is now seen as aiding manufacturing value addition.

  • Investment growth remains the lynchpin for demand-side activity, supported by a continued thrust on public capex. This is manifested in continued momentum in construction activity (which indirectly helps to absorb excess rural labour) and should have a multiplier effect on the overall economy in the medium term.

  • Concern over the drag on headline GDP from net exports continues to recede.

Most importantly, FY24 is likely to face the full burden of the anticipated global slowdown and the lagged impact of past monetary tightening, it said.