New Delhi: The India's Gross Domestic Product (GDP) for Q2 (July- Sep) registered a growth of 7.6 per cent. This is higher than expected by the RBI, which predicted the Q2 GDP growth at 6.5 per cent. The overall GDP growth of 7.6 per cent reflects the resilience and strong fundaments of the economy.
The Central Statistical Organisation (CSO) introduced the quarterly estimates of Gross Domestic Product (GDP) in 1999. Quarterly Releases include GDP estimates compiled through production approach (QGDP) and quarterly expenditures of GDP (QGDE) compiled through expenditure approach. The quarterly estimates helps to understand the intra-year economic dynamics in the economy and policy changes can be altered accordingly to achieve higher growth.
What contributed for the growth in Q2?
The growth is said to be balanced when all the sectors of the economy contribute to the growth. In Q2 2023, all the sectors registered positive growth. The high gross fixed capital formation (which will have a higher multiplier effect) created a crowd in effect on private investments, have contributed to the high positive growth. This coupled with strong government consumption, growing at a 10-quarter high of 12.4 per cent YoY.
The jump in the capital expenditure by the Centre is a major driver of growth in the second quarter, with Government Fixed Capital Formation (GFCF) increased to 11.04 per cent as against 9.6 per cent growth in the Q2 2022-23. To ramp the virtuous cycle of investment and job creation the budget 2023-24 steeply increased the capital expenditure outlay by 37.4 per cent in BE 2023-24 to whooping Rs.10 lakh crore over Rs. 7.28 lakh crore in RE 2022-23.
There is also a "Political budget cycle" theory which says that the governments spend more capital expenditure in the financial year before the election year. This might be also a reason for high capital expenditures before Centre and various state government elections in 2023 and 2024.
In terms of a sector-wise breakup, the manufacturing sector registered a nine-quarter high growth of 13.9 per cent in Q2 2023 as against low base of (-)3.8 per cent in Q2 2022. Manufacturing growth is estimated from the Monthly Index of Industrial Production (IIP) from Quick Estimates of IIP released by CSO, MOS&PI and from the financial performance of companies listed with stock exchanges (BSE and NSE). The favourable market conditions like the easing of commodity prices, energy, metal, robust corporate earnings, revival in real estate demand and food prices also helped the Manufacturing sector to perform well in Q2.
Mining and quarrying grew at 10.0 per cent compared with -0.1 per cent in Q2 of 2022-23. At the sectoral level, high frequency indicators like especially production of coal, crude oil, cement and consumption of steel showed a strong growth performance. Private final consumption expenditure (PFCE), which is a proxy for consumption demand, is slowed down in Q2. It registered a +ve growth at 3.1 per cent in Q2 2023-24 compared with a 8.1 per cent growth in Q2 2022-23.
Reflecting this, private consumption expenditure, as a share of GDP, reduced to 56.8 per cent of GDP in Q2 from 59.3 per cent in the year-ago. At the same time, the agriculture sector growth fell down to 1.2 per cent compared to 2.5 per cent last year. This needs a greater attention due to climate change and food security.
Surprisingly, when other economic activities showed high growth, however, this growth was not transmitted to trade, hotels, transport, sales of commercial vehicles and purchase of private vehicles, passengers handled at airports and railways (cargo and passenger) faced hurdles. Trade, hotels, transport, communication and services grew at 4.3 per cent compared with 15.6 per cent in Q2 of 2022-23. This needs be to analysed more deeply. The possible reason could be that the pent up demand/ revenge travel are probably exhausted after Covid-19 and they are reached back to normalcy.
- The Year on Year growth rates of Select Indicators which explain the Growth.
- Head Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23
- Consumer Price Index (CPI) – Overall 5.66 4.70 4.31 4.87 7.44 6.83 5.02
- Gross Bank Credit (Outstanding)– Total 15.00 15.92 13.70 18.46 19.68 19.76 19.96
- Industry 5.72 6.90 5.43 8.08 5.75 6.67 7.10
- Services 19.60 21.44 18.58 26.53 23.12 24.72 25.12
- Personal loans 20.80 21.67 17.80 21.05 31.66 30.76 30.38
- GST Collection 12.69 11.64 11.50 11.67 10.81 10.76 10.17
- Capital Expenditure - Central Govt. 35.75 -0.59 217.35 62.80 14.86 29.92 29.01 (Source: Authors Calculation based on MOSPI Data)
There are some contradictory trends in the sectoral data when we compare them with other economic variables. Some indicators need deeper analysis. For example, why people mobility has come down? Why personal consumption expenditure has come down? Is there a parity between, goods mobility vs GST revenues?
The RBI gradually raised the policy repo rate by 250 basis points since May 2022 and now put a pause at 6.5 per cent. Inflation was a major concern, when CPI was above 6 per cent (in 2022-23) which is the upper limit of RBI inflation targeting. But, inflation has moderated over the months in 2023-24. The gross bank credit has consistently increased in the last 7 months.
Especially, there is high growth in the personal loans section in all these months. It increased over 20 per cent from March to June and above 30 per cent from July to September, 2023. Again, there is a consistent growth GST collection over the months. As mentioned above, there is a huge jump in the government capital expenditure. Despite of this positive trends in the data, it is paradoxical to see decline in personal expenditures.
Tax Buoyancy: Tax buoyancy, a measure of how tax revenues move with changes in output,1 reflects the underlying attributes of an economy, effective collections, and the effects of policy measures implemented over a period. According to chief economic advisor, Government of India, there is healthy revenue collection to government and with GDP growth of 8.6, the tax buoyancy is at the level of 1.9.
Global Factors: Achieving high growth at a time, the global demand is already weak reflects the strong domestic fundamentals. Due to global factors, the global demand is already weak and effecting exports. Hence, the domestic demand needs to be strengthened. A coordinated fiscal and monetary policies need to be implemented to address inflation, supply bottlenecks through sector specific schemes (like PLI and MSME schemes).
The Ukraine war disrupted the agri commodity prices and fertilizer prices. OECD outlook (2003) estimates that for each 1 per cent increase in fertilizer prices, agricultural commodity prices would increase by 0.2 per cent. Hence, achieving self-sufficiency in fertilizer production in very essential.
The future challenges: In the near to long term, uneven external demand and uncertainty in agriculture growth could result in a lower growth. Agriculture one area, which needs special attention. Also, 11 out of the 17 Sustainable Development Goals (SDGs) are directly linked to agriculture. According to NITI Aayog Report on Agriculture (2023), the two biggest challenges in agriculture are climate change and overexploitation and degradation of natural resources. To address these, there is a need to shift towards modernisation of agriculture which involve the introduction and promotion of knowledge and skill intensive practices within agriculture, green investments, new institutions of producers, integrated food system-based mechanisms, and new types of linkages between producers and end users are highly essential.
