Why it will be tough to sustain India’s 7.8% growth in first quarter of FY24

India’s GDP growth in the first quarter of the current fiscal (FY24) was 7.8 per cent, compared to 6.1 per cent in the previous quarter (Q4 of FY23). This was on expected lines, driven by a growth in private consumption as well as investment from the government. There has also been an uptick in private investment, which the government claims is a clear sign that the strategy to increase capital expenditure (capex) to push up private investment is bearing results. However, experts caution that this peak growth may not be sustainable throughout the year.

But first, the reasons for a good show in growth. A note from Crisil says the government had frontloaded its capex at the start of the fiscal, along with the revival of private investment. The share of investment in the GDP remains close to a decadal high of around 35 per cent. Meanwhile, private consumption recorded a sharp uptick at 6 per cent. What boosted demand is the sharp fall in retail inflation in the first quarter, which added to the consumers’ purchasing power. But this may not be sustainable as inflation has remained high in recent months. Support also came from bank credit, which has maintained double-digit growth despite elevated interest rates, Crisil said. Services saw the sharpest rise in growth, and within this segment, growth was the highest in the financial, real estate and professional services.

But there are headwinds to this growth. One is clearly the external sector, which is showing a lag. This slowdown has hit India’s exports. The US has seen a downgrade of its sovereign debt rating by Fitch. With the US national debt climbing to a staggering $33 trillion, it has been warned to tighten its fisc. Meanwhile, the $18 trillion Chinese economy is slowing down considerably. According to the International Monetary Fund (IMF), a 1 per cent growth in China leads to a 0.3 percentage point growth in other countries. China is India’s second-largest trading partner, accounting for 11.2 per cent of India’s goods trade. Exports to China are bound to suffer as its economy slows down.

According to a report, small Indian businesses, which account for almost 40 per cent of exports, will face headwinds from the imminent economic slowdown in advanced countries, particularly the US and Eurozone, while a Crisil analysis suggests that one in five MSMEs will also see stretched working capital. The US and EU markets account for a third of India’s overall exports.

D.K. Joshi, chief economist, Crisil, says China does not matter much to India since only 5 per cent of Indian exports go there, whereas 34 per cent goes to Europe and the US. “Our exports to Asia have also been slowing, which is of concern. From a merchandise trade perspective, there are clear headwinds and these are visible in the data too,” says Joshi. Exports have contracted for five months. The contraction deepened in June, which saw a 22 per cent dip in exports compared to last year. A slowing global economy will spill over to exports and to sectors which do exports, Joshi told INDIA TODAY. Yet another worry is inflation, and that too related to weather conditions. “We need to closely monitor food inflation. The other is core inflation,” he says.

Madan Sabnavis, chief economist with the Bank of Baroda, agrees that inflation would play spoilsport in sustaining the growth momentum. Inflation was to come down to the 4 per cent mark, but it looks like it may not happen this year. What started as cereal inflation has gone to pulses, vegetables and now fruits and spices. The exact course—whether it is stable or inflation is higher—will be known when we come to the end of the kharif harvest, he said.

According to Sabnavis, the most serious problems continue to be the two preconditions for growth—consumption and investment. “Going through presentations of consumer goods companies, they are still looking for rural demand to revive during the third quarter—the harvest and festival season. There was a lot of optimism in the fourth quarter results of companies, but the firms have not been too positive in terms of rural demand, and their products are more focused towards the urban areas,” he says. The pent-up demand India saw last year has come to an end, especially in manufactured goods. “Consumption cannot be addressed by the government alone,” he adds. Clearly, it’s still too early to celebrate India’s high growth in the first quarter, as much depends on how the country navigates the tough terrain ahead.

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