The GDP data for the July-September quarter showed a healthy surprise on the upside. India’s economy grew by 7.6 per cent in the quarter (Q2FY24) compared with the RBI’s forecast of 6.5 per cent and most analysts’ predictions of 6.8-7 per cent. The healthy GDP print, which ensured that India retained its spot as the world’s fastest growing major economy, came on the back of a strong showing in manufacturing and construction activity. At constant prices, manufacturing gross value added (GVA) rose 13.9 per cent, the highest in nine quarters, while construction GVA grew 13.3 per cent. While private sector infrastructure spending is improving, most of the boost to construction came from public sector capital expenditure.Thus, propped up by government spending, the economy is firing on some cylinders. Sectors like mining, electricity and utility services witnessed a double-digit expansion in the quarter. There was a slight year-on-year deceleration in services like real estate, financial sector, hospitality and trade.
The healthy GDP growth numbers could lead to most agencies, banks and multilateral institutions raising their GDP forecasts for India, for FY24. However, there are two data points to note. Agriculture GVA at constant prices grew 1.2 per cent, down from 3.5 per cent in Q1 and 2.5 per cent in Q2FY23. Meanwhile, private final consumption expenditure (PFCE) -- a proxy for household consumption -- slowed down sharply to 3.1 per cent in Q2, compared with 6 per cent in Q1. Both of these can be attributed to the uneven monsoon, which hit the rural economy.
And therein lies the rub. Corporate executives have been talking about subdued demand in rural regions as well as some sections of the urban salaried classes. Car sales are booming, led by sports utility vehicles and premium cars. However, entry-level car sales are said to have fallen more than 40 per cent year-on-year in April-September. Two-wheeler sales continue to struggle, especially for entry-level motorcycles, a sure indicator of rural slowdown. Companies in the fast moving consumer goods (FMCG) sector have been depending on urban sales. Hindustan Unilever cited weak rural demand for its sluggish Q2 financial results. Even in housing, premium homes are selling fast while affordable homes are not. The festive season began in mid-October this year. The economy will benefit if demand has picked up in the current quarter. It is expected that as welfare outlays from the Centre and states increase in this key election cycle, rural demand will bounce back and consumption will pick up. After all, there are limits to how much of the weight of the economic boom can be carried
by the top 10 per cent of the population, or be stoked by public sector expenditure.