Government Sharply Revises Growth Forecast, But Don’t Open The Champagne Yet!

The latest estimate released by the National Sample Survey Organisation, which makes India the fastest growing among the world’s major economies, will likely add to investors’ optimism, support the bullish trend in the stock market and offer the government with additional headroom for fiscal maneuvers.

That said, concerns remain around weak consumption demand, primarily from rural households and lower economic classes, and sluggish exports that are unlikely to improve in the face of a slowing global economy. The former is a domestic drag, while the latter is a global dampener on the Indian economy’s prospects beyond this fiscal.

The revised GDP number is powered by robust growth in manufacturing and construction, which appear to have more than offset a poor performance by the farm sector that has been affected by erratic monsoon.

Manufacturing is expected to grow 6.5 per cent, compared to a dismal 1.3 per cent growth last year. The construction sector is projected to grow by 10.7 per cent, besting its previous year growth of 10 per cent.

Strong growth in construction spells good news as it creates significant employment opportunities for unskilled and semi-skilled workers at the bottom of the jobs pyramid.

Better industrial growth, in turn, has come on the back of a healthy growth in investment demand as governments, the Centre and the states, continue to spend heavily on infrastructure and capital goods projects. Investment has grown by a strong 10.3 per cent, taking the share of fixed capital in GDP to a decadal high of 39.4 per cent.

However, economists feel, for this investment growth to be sustained, consumption demand has to be catalysed. Especially because weak global demand is likely to continue given the festering military conflicts in Ukraine and West Asia and a sustained rise in both energy and shipping costs. India has not been able to make much headway on the exports front. Exports are expected to grow by just 1.4 per cent.

Private consumption is projected to grow 4.4 per cent, much slower than the headline number, mirroring a possible rural distress that is pulling down demand for non-premium consumer goods.

For example, much of the turnaround in automobile and real estate sectors has come on the back of robust sales growth in premium segments, emanating from big cities and urban centres.

Sales of SUVs, sedans and electric vehicles have led the growth in the passenger vehicle segment, while the two-wheelers’ segment has since action mostly limited to higher end (200 cc plus) bikes. Similarly, the housing market is buzzing with premium project launches, showcasing 3 BHK and 4BHK flats, while affordable housing has ceased to make headlines.

Clearly, the impact of erratic monsoon on agriculture has led to a squeeze on rural incomes, and thus keep rural demand depressed. A patchy monsoon saw kharif output shrink by 4.6 per cent. Prospects for the rabi crop don’t look great either. The NSSO sees farm output growing 1.8 per cent this fiscal, compared to 4 per cent growth in 2022-23.

On the other hand, the services sector – the other major source of domestic consumption demand – is expected to slow down through the coming quarters. Trade, hotels, transport, communication etc., may grow 6.3 per cent, compared to a 14 per cent growth last year. Finance, realty and professional services are forecast to grow by 8.9 per cent, better than the 7.1 per cent growth registered in 2022-23.

Which is why, notwithstanding the upward revision in the full-year numbers, the NSSO estimates imply GDP growth slowing from 7.7 per cent in the first half of FY 2023-24 to 6.9 per cent in the second half of the year. Unless there is a significant revival in rural demand and the global headwinds give way, it is unlikely that the Indian economy will be able to stay afloat on a 7-per cent-plus growth trajectory.