New Delhi: Despite strong global headwinds that led to a contraction in the country’s exports, a stellar performance by the services sector, particularly the contact-intensive services such as hotels, trade and transport, and continued momentum in the country's farm sector helped India to clock a 7.8% economic growth rate during the first quarter (April-June 2023) of the current financial year, making the country fastest growing major economy in the world.
Despite the base effect, a sequential acceleration in GDP growth during the first quarter of FY 2023-24 indicates that the economic recovery is on as the contact-intensive services sector picks up momentum. On the demand side, while private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) witnessed growth in the first quarter, government final consumption expenditure (GFCE) and exports of goods and services recorded contraction.
Sunil Sinha, Senior Director and Principal Economist at India Ratings said the PFCE grew at 6.0% on the y-o-y in the first quarter. “India Ratings believes a broad-based recovery in PFCE is some distance away. The current consumption demand is skewed towards goods and services consumed largely by the households falling in the higher income bracket,” Sinha told ETV Bharat.
According to Sinha, a healthy growth of 8.0% of the y-o-y in GFCF in the first quarter suggests a continuation of government capex. In the absence of private corporate sector capex, it is providing the necessary support to the ongoing recovery, said Sunil Sinha, adding that early signs of a revival of private corporate sector capex are becoming visible.
He said the pickup in private corporate capex augurs well for the gross fixed capital formation (GFCF) in the Indian economy. While decoding the 7.8% GDP growth rate, Gaura Sen Gupta, Chief Economist at IDFC First Bank, said sector-wise details indicate growth led by services sector and continued expansion in the manufacturing sector.
Also read: GDP grows at 7.8 pc in Apr-Jun, India remains fastest growing economy
“Within services, private services growth remains strong, led by real estate and financial sector and contact intensive ‘trade hotels and transportation’, Sen Gupta told ETV Bharat in a statement.
She said the strong growth in real estate was indicated by stamp duty collections and pick-up in financial services was expected on the back of strong credit and deposit growth. “Listed company performance had showed strong profit growth for the services sector and continued expansion in the manufacturing sector. Decline in input cost pressures has supported company profitability, more than countering slowdown in sales growth,” noted the economist.
Talking about the expenditure side, Gaura Sen Gupta said the internals were positive with a pick-up in private consumption growth and continued strong growth in capex cycle. "Consumption growth is likely to be led by urban demand, with strong real urban wage growth and nascent signs of recovery in rural demand. Capex cycle has been supported by the government with a sharp rise in capital expenditure in Q1FY24 by both Centre and state governments" noted the economist.
Export worries
Though a strong performance of services sector and real estate helped India maintain the economic growth momentum but contraction in Government expenditure (GFCE), and contraction in the country’s exports highlighted the risk to the economy due to the global slowdown.
While exports recorded a decline of 7.7% during the first three months of this financial year on the y-o-y basis, the government final consumption expenditure (GFCE) contracted by 0.7% in the quarter. Analysts have already suggested that the growth in merchandise exports may not sustain the first quarter of this fiscal.
Farm sector registers 3.5% growth
On the supply side agriculture, as expected, grew at 3.5% in the first quarter. However, the first quarter farm sector gross value added (GVA) is dependent on previous fiscal’s agriculture performance due to harvesting spilling over to the new fiscal.
Industrial Sector records 5.5% growth
Industrial sector GVA grew at 5.5% in first quarter. Amongst its various segments, construction recorded the highest growth of 7.9%, followed by mining which grew by 5.8%. Electricity and utility services grew 2.9% and manufacturing 4.3% during this period.
Services sector register double digit growth
As per the latest official data, most impressive growth was recorded by services, the largest component of GVA. It grew of 10.3% in the first quarter.
Some components of the services sector which were severely dented for being contact intensive have now begun to show complete revival.
The largest component of trade, hotels, transport and communication grew at 9.2% on the y-o-y basis in the first quarter. The other two components of services sector namely - financial, real estate and professional services and public administration clocked a growth of 12.2% and 7.9% respectively during this period.
GDP growth shows resilience
According to Sinha and Jasrai, the growth momentum witnessed in the first quarter is indicative of Indian economy’s resilience despite global headwinds. However, the road ahead is not going to be easy so long as PFCE does not recover fully and become broad based, they said.
Extreme climate impacts farm sector
According to Sinha, the impact of El Nino on this year’s monsoon could bring agricultural growth under pressure and the spillover effect of this would be felt on food inflation.
A government intervention in agriculture and drought relief measures could destabilise the fiscal arithmetic of FY24. Amidst these challenges, however, revival private corporate capex is expected to bring relief to the economy, Sinha explained.
Also read: India’s current account deficit will decline to $10 billion in Q1: India Ratings
