Business News/ Economy / GDP: How consumers saved the day as government spending slowed during polls
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The Indian economy grew 6.65% in the first quarter of the current financial year, a notable slowdown from the 7.76% recorded in the previous quarter. This deceleration was anticipated, driven by reduced government spending and the reversal of the statistical effect of a low subsidy outgo.
The Indian economy grew 6.65% in the first quarter of the current financial year, a notable slowdown from the 7.76% recorded in the previous quarter. This deceleration was anticipated, driven by reduced government spending and the reversal of the statistical effect of a low subsidy outgo.
However, beyond the headline number, the GDP data released last week revealed several surprises, highlighting the underlying resilience of economic activity. Notably, the 6.84% growth in gross value added (GVA) was the highest in three quarters, and private consumption made a strong comeback after a prolonged lull.
However, beyond the headline number, the GDP data released last week revealed several surprises, highlighting the underlying resilience of economic activity. Notably, the 6.84% growth in gross value added (GVA) was the highest in three quarters, and private consumption made a strong comeback after a prolonged lull.
Mint takes a closer look at the key details and what they might mean for the months ahead.
Consumption climbs
Private consumption, which constitutes 50-60% of India’s GDP, plays a critical role in the overall economic performance. For much of last year, even as GDP growth kept breaching the 8% mark, private consumption lagged at the halfway mark, raising concerns about the robustness of the growth momentum.
In the June-ended quarter, however, private consumption growth surged to 7.45%, up from 3.99% in the March quarter, contributing positively to GDP growth after a gap of seven quarters. Without this rebound in private final consumption expenditure, GDP growth would have been over 1 percentage point lower.
“Typically, private consumption expenditure contracts in April-June [relative to] January-March due to seasonal effects. However, this time, the sequential contraction was just 1.6%, the lowest since 2011-12, and significantly below the pre-pandemic average sequential contraction of 3.3%," according to a note by rating agency CareEdge.
Don’t mind the gap
Since the pandemic, the government has significantly ramped up capital expenditure to support the economy. However, the first quarter of the financial year, which coincided with general elections, saw a disruption in government activity, reducing its economic support. This was reflected in a nearly 35% year-on-year decline in the Centre’s capital expenditure and a 0.2% contraction in government final consumption expenditure.
Reserve Bank of India governor Shaktikanta Das, too, attributed the lack of government spending as one of the major factors behind the slowdown in growth.
Despite this, the construction sector—usually boosted by capital expenditure—and the ‘public administration, defence, and other services’ segment, which typically includes government consumption expenditure, remained robust. The construction sector may have benefited from strong housing activity, while the latter segment likely saw growth from activities related to education and personal services, among others.
Trade troughs
One of the components of GDP is net exports of goods and services (i.e., total exports minus imports). It’s usually a negative figure since India runs a goods trade deficit. In 2023-24, this negative gap was even larger due to the slowdown in India’s key export markets, and hence was a drag on overall GDP. However, in the June quarter, despite declining to a huge (-) ₹2 trillion, net exports had a positive impact due to a favourable base effect.
This export-import gap narrowed 11.4% year-on-year, adding about 70 basis points to GDP growth, according to Barclays. Net exports are expected to remain a cause of worry amid disruptions expected from a possible US recession, which could drag services exports down, and global geopolitical tensions, which could pull goods exports down. With the base effect also fading in coming quarters, the performance of trade in a tough global environment would be crucial.
Deflator dissonance
While output is first estimated at prevailing market prices (‘nominal’), it needs to be ‘deflated’ to determine an inflation-adjusted ‘real’ growth. For much of 2023, low wholesale inflation kept the gap between nominal and real growth low. This began to change as wholesale inflation left the negative territory in November 2023 and rose to as much as 2.04% in July 2024. As a result, the real GVA growth of 6.84% was as much as 3 percentage points lower than the nominal growth.
However, the gap varied sharply among sectors, possibly due to the different approaches adopted by the statistics ministry to deflate prices. The nominal-real growth gap was huge for sectors for which a ‘double deflation’ method is used (where the value of both output and input are adjusted for inflation), such as agriculture and mining. Experts have often criticized the mix of approaches and often argue for a consistent method to deflate prices.
Outlook steady
While the absence of government spending due to elections was evident, it did not significantly derail the economy’s momentum. As the new government took office, capital expenditure activity doubled in July compared to a year ago, which is expected to provide a boost in the ongoing quarter.
High-frequency indicators also point to improving consumption demand, with tractor sales, a key indicator of rural demand, showing stronger year-on-year growth in July amid increased agricultural activity. The composite purchasing managers’ index, growth in eight core sectors, and non-food credit also remained strong. However, a widening goods trade deficit could become a drag.
“We anticipate a back-ended pickup in the GDP growth to above 7% in October-March, boosted by government capex and pent-up rural demand during the festive months," rating agency Icra Ltd said in a note.
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