India Q2 GDP Preview: Economists Expect Resilient Economy To Grow 7%

Indian economic growth is expected to remain on track in the second quarter of FY24, despite growing at a slower pace.

The gross domestic product is estimated to grow by 7% in July–September 2023, according to economists polled by Bloomberg. That's lower than 7.8% in the previous quarter. Gross value added is expected to expand to 6.8%, compared to 7.8% in Q1.

A normalising base and an erratic monsoon are expected to result in a sequential moderation in GDP growth to 7% in Q2, Aditi Nayar, chief economist at ICRA, said. "Regardless, we anticipate that the GDP expansion in this quarter will exceed the Monetary Policy Committee’s October 2023 projection of 6.5%.”

Underlying growth trends continue to look robust in India, with activity underpinned by domestic consumption, high levels of state-led capex, and strong growth in the utilities sectors, said Rahul Bajoria, chief economist at Barclays. He forecasts GDP to grow by 6.8% on an annual basis.

In terms of the sectoral breakdown, services are expected to continue to be the largest contributor to growth, despite slower expected growth in the financial services and 'trade hotels and transport' categories, said Bajoria, who forecasts the sector to grow by about 7.7%.

ICRA estimates industrial GVA growth to have risen to 6.6% in Q2 FY24 from 5.5% in Q1 FY2024, boosted by manufacturing, electricity, and mining. Manufacturing is expected to witness an uptick, growing by 5.5% in Q2 FY24 from 4.7% in Q1, benefiting from higher volumes and continuing albeit slower tailwinds from commodity prices. Moreover, electricity generation is expected to witness a double-digit expansion of 11.1% on an annual basis in Q2 FY24, from 1.3% in Q1 FY24, benefiting from the surge in electricity demand owing to sub-par monsoon rainfall, according to ICRA's forecasts.

High-frequency data suggests that the momentum of construction activity remained healthy in Q2, with the sub-par rainfall resulting in relatively lower disruptions in the quarter vis-à-vis what was typically seen in the past, Nayar said. "However, with a slowdown in national highway construction, the GVA growth of this sub-sector is likely to have eased to 7.0% in Q2 from 7.9% in Q1."

While Barclays forecasts growth in the agriculture sector to remain on trend at 3%, ICRA forecasts the sector to grow at the slowest pace since Q4FY19. "Owing to the decline in output across all kharif crops projected by the First Advance Estimates, ICRA projects the growth in agriculture, forestry, and fishing to dip sharply to a muted 1% in Q2 from 3.5% in Q1," it said.

For FY24, GDP is forecast to grow 6.3%, with upside emanates largely from very strong consumption demand, which is visible across a variety of high-frequency data, Bajoria said. "Indeed, credit growth, electricity consumption, and mobility indicators  all paint a picture of economic resilience; hence, we believe that the domestic economy will continue to drive growth," he added.

While there could be some upside risks to GDP growth if the current pace of activity continues, GDP growth in H2FY24 is expected to moderate, in large part due to waning support from base effects, said IDFC First Bank Economist Gaura Sen Gupta. Growth momentum is expected to moderate as company profit growth slows, she explained. The strong growth in H1 profits for services and manufacturing is due to a reduction in input cost pressures, which has countered the slowdown in sales growth, she added.

Recovery in rural demand has remained mixed due to the relatively softer pace of rural wage growth and the uneven monsoon, Sen Gupta said. The nominal GDP print will also be under focus as deflator growth has decelerated sharply in FY24, with WPI inflation in negative territory. "For now, FY24 nominal GDP growth is tracking at sub-9%, weaker than the 10.8% pencilled in the Union Budget."

An uneven rainfall, narrowing differentials with year-ago commodity prices, the possible slowdown in momentum of government capex as we approach the parliamentary elections, weak external demand and the cumulative impact of monetary tightening are likely to translate into lower GDP growth in H2 FY2024, Nayar said, forecasting growth for the full year at 6.0%.