Private Consumption To Drive Growth In Q1, Says RBI

India’s domestic economic conditions have sustained the quickening of momentum seen in the last quarter of FY23, according to the Reserve Bank of India.

Overall economic activity, as captured by the RBI's economic activity index, remains resilient. Based on partial data available for April 2023 and assuming an implied GDP growth of 5.1% for Q4 FY23, the economic activity index nowcasts GDP growth for Q1 FY24 at 7.6%, the RBI said in its monthly bulletin published on Monday.

Corporate earnings are beating consensus expectations, with the banking and financial sectors posting strong revenue performance, aided by robust credit growth.

In the first quarter of FY24, growth is expected to be driven by private consumption, supported by reviving rural demand and renewed buoyancy in manufacturing on easing of input cost pressures, it said.

Going by lead indicators, such as mandi arrivals and cumulative procurement of wheat so far, the rabi harvest may set a new record, which should provide a boost to the rural economy, the central bank said.

According to it, mandi arrivals of paddy in the Kharif marketing season (October 2022 to date) have been the highest in eight years. Although mandi prices of paddy are slightly lower than the minimum support price, retail prices are firming up at a time when both global rice prices and India’s exports of rice are looking up.

The RBI’s projections released in April indicated that real GDP may grow by 7.8% year-on-year, which works out to 13.7% above its pre-pandemic level in the corresponding quarter of FY20. This projection embeds negative momentum (-1.7%) on a seasonally adjusted quarter-on-quarter basis, the RBI said.

While this is typical of first quarter out-turns, the magnitude of the negative momentum is less than what it was in the first quarters of the preceding two years. Thus, a gradual normalisation of the impact of the pandemic and the war is setting in, it said.

• Investment activity is also expected to improve, drawing strength from the thrust on capital expenditure in public spending and moderation in commodity prices, the central bank said.

• With capacity utilisation in manufacturing at trend levels and above in some industries, private capital spending will need to get stronger to add additional capacity as demand picks up.

• The manufacturing sector as a whole is expected to gain from softening input cost pressures.

• If service exports maintain their recent high profile, the drag from net external demand should moderate through April–June 2023.

• Domestic service sector activity will continue to be led by the rebound in contact-intensive services and the resilience in construction activity.