India's Robust Q2 FY24 Economic Growth Defies Global Challenges
In the face of global headwinds, inflationary pressures, and a high-interest-rate environment, India has showcased its economic resilience with a stellar 7.6% y/y growth in the second quarter (Jul-Sep) of FY24. This growth figure, released by the National Statistical Office, surpassed market expectations, which had pegged it at 6.8% y/y.
Figure 1: India GDP and leading growth sectors (% y/y)
Source: MOSPI, Continuum Economics
A significant driver of this impressive growth was the remarkable increase of 10.9% y/y in capital formation and a substantial 12.4% y/y surge in government spending. This was primarily driven by the government's allocation of INR 10tn worth of capital expenditure in the FY24 union budget to drive economic activity, sustain the growth momentum in the run-up to the April-May general elections. A multitude of infrastructure projects have been initiated and completed to sustain economic activity but also increase government visibility.
A notable concern emerged though with the deceleration of private consumption growth, nearly halving to 3.1% y/y during the quarter. Private consumption appears to be normalising in the aftermath of the pent up demand that was released in the post-Covid phase. Nevertheless, private sector demand still remains strong, with the rural economy also showing signs of recovery. Additionally, the government's various populist schemes, food subsidies etc. are likely to ensure that rural demand picks up, as disposable income is used more for discretionary spending, as opposed to essentials only.
The manufacturing sector emerged as the star performer, reflecting sustained consumer demand, optimal industrial capacity utilization, and reduced product stock. This sector recorded an impressive 13.9% y/y. Another factor contributing to the growth was the upcoming festive season in India, which begins from end-September to end-November. Similarly, the construction sector showcased robust growth, driven by the increasing demand for real estate in Indian cities and the government's continuous efforts in infrastructure development. India's FY24 budget's emphasis on capital expenditure for infrastructure projects played a pivotal role in driving economic activity. Other sectors that exhibited promising growth included utilities and financial and real estate services. However, the trade, hotels, and communication sector experienced a slowdown, primarily influenced by high base effects.
On the contrary, the agriculture sector faced challenges, with a subdued growth of 1.5% y/y attributed to disruptions caused by erratic monsoons during the July-September quarter. The delayed onset of the monsoon further impacted agricultural activities.
India continues to maintain its status as the fastest-growing emerging market, with leading institutions forecasting annual growth between 6% and 6.4% y/y. However, despite two consecutive quarters of robust growth exceeding 7.5% year-on-year, the overall GDP growth for FY24 is expected to moderate to around 6.8% y/y. Several downside risks loom on the economic horizon, including tight monetary conditions, rising inflation, and a weakened external sector. The agricultural sector faces challenges due to disruptions caused by heavy rains, but domestic demand is anticipated to offset the impact of the declining external sector. The manufacturing sector may encounter difficulties amid a global economic slowdown, and the potential adverse impact of an El Nino event could further hamper economic output in the coming quarters.