India’s first quarter GDP may surpass RBI MPC projection

• MPC has forecast growth at 8.0% for the first quarter while ICRA is projecting it at 8.5% and SBI at 8.3%.
• While ICRA has maintained that the annual growth in this fiscal will be below the current MPC estimate of 6.5%, the SBI report believes it will be higher.
• As many as 11 of the 14 high-frequency indicators pertaining to the services sector recorded a YoY growth in Q1 FY2024.

The Indian GDP may surpass the latest Reserve Bank of India projections for the first quarter of the current financial year (Q1FY24) as per reports released by SBI and credit rating agency, ICRA. In its last policy, the RBI Monetary Policy Committee (MPC) had left its growth forecast unchanged at 8.0% for the first quarter while SBI is projecting it at 8.3% and ICRA is projecting a 8.5% growth in this period. The reason? As many as 11 of the 14 high-frequency indicators pertaining to the services sector recorded a YoY growth in Q1 FY2024.

Despite headwinds, in India, global economic activity has remained resilient in the Q1FY24, driven mainly by the services sector.

“Economic activity in Q1 FY2024 was boosted by a continued catch-up in services demand and improved investment activity, particularly a welcome front-loading in Government capital expenditure. Moreover, sharply lower prices of various commodities on a YoY basis supported margins in some sectors,” said Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA.

Soumya Kanti Ghosh, Group Chief Economic Adviser of SBI concurs. He says in the latest SBI Ecowrap, "Despite headwinds, In India, global economic activity remained resilient in the Q1FY24, driven mainly by the services sector. This is in sharp contrast to IMF’s latest forecast estimating global growth to fall from 3.5% in CY22 to 3% each in CY23 and CY24 with rapid rate hikes by central banks to fight sticky inflationary trends weighing on economic activity."

The ICRA report also states that the GVA (gross value added) growth is seen at 8.1% in Q1 FY2024 (+6.5% in Q4 FY2023), driven by the recovery in the services sector (+9.7% vs. +6.9%), even as improved margins are likely to have shielded the industry (+7.3% vs. +6.3%) from weak external demand, with a relatively lower growth foreseen in agriculture (+4.0% vs. +5.5%).

A word of caution

Unseasonal heavy rains, the lagged effect of the monetary tightening and weak external demand is likely to exert a downward pressure on the GDP growth, as per the report. Moreover, the upcoming general elections can play their part in the second half of the fiscal year. Thus, ICRA has maintained that the annual growth in this fiscal will be below the current MPC estimate of 6.5%.

“… We are circumspect that erratic rainfall, narrowing differentials with year-ago commodity prices, and possible slowdown in momentum of Government capex as we approach the Parliamentary elections, could dampen GDP growth in H2 FY2024 below the MPC’s forecasts. Overall, we maintain our FY2024 GDP growth estimate at 6.0%, lower than the MPC’s projection of 6.5% for the fiscal,” said Nayar.

SBI bullish on annual growth

The SBI Ecowrap points out that there has been a surge in capital expenditure in the first quarter, with Central government spending 27.8% of budgeted, while states at 12.7% of budgeted. This the report says will auger well for the annual growth which the RBI MPC has projected at 6.5%.

"The FY24 growth to be higher than 6.5%, public sector and private sector bank credit expanded at a robust and equal pace. And capital expenditure of centres and states expanded at a rapid pace in Q1FY24," the report points out.


First quarter highlights

1. Capex-related ECB flows (for the purpose of modernisation, new projects, and local purchase and imports of capital goods) jumped to $13.0 billion in Q1 FY2024, exceeding the full-year FY2023 levels ($9.6 billion).
2. Boosted by housing construction projects under the Ministry of Housing and Urban Affairs, the value of project completions touched a record high of Rs. 7.8 trillion in Q1 FY2024, surpassing the record high of Rs. 6.5 trillion in FY2017.
3. As many as 11 of the 14 high-frequency indicators pertaining to the services sector recorded a YoY growth in Q1 FY2024, with the pace of expansion ranging from 0.3% (telephone subscribers) to 18.6% (domestic airlines passenger traffic).
4. Indicators such as CV sales (-3.3%) and air cargo traffic (-0.4%) saw a mild YoY contraction in Q1 FY2024.
5. ICRA estimates the industrial GVA growth to have risen to 7.3% in Q1 FY2024 from 6.3% in Q4 FY2023, boosted by the manufacturing sector.
6. Most indicators pertaining to construction activity witnessed an improvement in Q1 FY2024, suggesting a robust GVA growth of 9.0% for this sub-sector.
7. The year-on-year growth in electricity generation dipped to an 11-quarter low of 1.3% in Q1 FY2024, owing to an unfavourable base as well as the excess rainfall seen in the first half of the quarter.