India’s growth path is not without its trials

What stands out is that the two crucial growth engines for the economy picked up pace in Q1. First, private consumption, the strongest growth driver, has inched up after two quarters of dismal performance. Complementing this, has been the continued robust growth in investment as reflected in the buoyant gross fixed capital formation print, aided by the frontloading of government capital spending.

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Secondly, services, the other growth engine, has rebounded to double-digit increase in Q1, from subdued performance in the second half of FY23. The uptick in services is broad-based, with components such as trade and hospitality holding on to the momentum while others like financial and professional services and real estate are rebounding strongly.

So far, so good. Will the good run sustain then? Much would depend upon the inherent strength in domestic demand hereon. Economists from Kotak Institutional Equities expect GDP growth to have peaked in Q1FY24 and growth rates will gradually taper off. They do add that demand conditions in the near term are likely to hold up in the run-up to the festive season.

Consumption spending should get a further boost in the second half of 2023 thanks to the festive season. Further, in recent months, most high-frequency indicators of consumer demand such as passenger vehicle sales and air passenger traffic have been robust. Additionally, firm spending outlook coupled with the recent strength in the capex cycle is likely to hold up the growth dynamics well.

Meanwhile, manufacturing growth should remain supported too, as corroborated by the continued uptick in India’s manufacturing Purchasing Managers’ Index (PMI). The index rose to a three-month high of 58.6 in August, remaining above the critical 50 mark for the 26th consecutive month. A reading above 50 denotes expansion in activity.

Nevertheless, there are challenges on the growth path ahead. First, despite an uptick in services growth in Q1, its sustainability needs to be seen amid the likely growth slowdown in developed economies. This is somewhat evident in the RBI data on services exports, which has shown modest growth in the first four months of FY24 as compared to double-digit rise in FY23. Second, the monsoon has been patchy with August being the driest month on record. Further, slow crop sowing is likely to weigh on agriculture growth alongside adding to inflationary concerns.

“The intensification of the El Nino weather phenomenon is the biggest risk to the rural economy and overall GDP growth. Already, we find that rural indicators such as real rural wages and non-durables consumption, are weakening,” point out HSBC Global Research economists.

To be sure, a healthy GDP print backed by recovery in domestic demand, along with robust high-frequency indicators pushes back any urgency of a rate cut by the RBI, particularly since inflation is still above the central bank’s target band. Meanwhile, some growth support is likely from the fiscal side in terms of higher spending towards the end of the year, closer to the general elections in 2024. This will likely have a favourable impact on the growth trajectory directly as well as indirectly through positive spill-over on private spending. Amid the challenges, careful policy coordination between the monetary and fiscal sides at this juncture will be crucial in holding up economic momentum while containing inflation, thus reaffirming the India growth story.

Updated: 04 Sep 2023, 01:24 AM IST