What a scorcher: Can India sustain this torrid pace of growth?

India's manufacturing growth grew in double digits, surprising many (Pixabay)
India's manufacturing growth grew in double digits, surprising many (Pixabay)

Summary

  • To the surprise of many, India's Q3 FY24 GDP growth came in at 8.4%. How did the Indian economy achieve this, and can it keep this momentum up?

The Indian economy grew at a surprising 8.4% in the third quarter of FY24. Will this pace of economic expansion continue in the fourth quarter? What is the outlook for 2024-25? Mint looks deeper into the third quarter performance and the prospects for the next few quarters.

Why did the Q3 GDP clip surprise many?

After strong growth in the first two quarters of 2023-24 (8.2% in Q1 and 8.1% in Q2), it was expected that the economic expansion will moderate to 6.5% levels in the third quarter. This was because manufacturing, mining and electricity sectors were showing signs of weakness, and an uneven monsoon was hurting agricultural output. The government had also revised downwards the 2022-23 GDP growth from 7.2% to 7%. But the data released last week put the third quarter GDP growth at 8.4%. At the same time, economic expansion measured by gross value added (GVA) was just 6.5%, an unusually wide gap.

What has contributed to this growth?

Manufacturing, driven by strong orders for plant and machinery, grew at a fast 11.6% in comparison to a negative growth of 4.8% in the same quarter of FY23. Investment, as measured by gross fixed capital formation, grew by 10.6%, indicating private investment in the economy is beginning to pick up. The mining sector too did well. The performance of the services, construction and electricity generation sectors remained steady. However, government consumption and exports fell sharply even as private consumption continued to remain tepid. As expected, agriculture posted a negative growth.

Where does this place FY24 in terms of growth?

The first advance estimate had put the 2023-24 GDP growth at 7.3%. The second advance estimate has now revised it to 7.6%. This comes on the back of a 7% growth in FY23. India will continue to be the fastest growing large economy in the world in FY24. The International Monetary Fund says China is expected to grow by 4.6% and the US by 2.1%.

Can this pace continue in the next quarter?

Unlikely. The economic moderation expected in Q3 will now happen in Q4. Government spending that fuelled growth in the past three quarters has run its course. Patchy rain will continue to impact agriculture. Exports have been impacted by subdued demand from the West, which is still battling inflation and has tightened its monetary policy. Geo-political flareups like the Red Sea crisis are adding to the problem. It is estimated that the economy will expand by 5.9% in the fourth quarter.

What about the next financial year?

India’s post-covid economic recovery has been strong. In FY22, it grew by 9.7%, followed by 7% growth in FY23 and a 7.6% (expected) in FY24. Government spending on infrastructure, strong exports and reasonably good private consumption, especially in urban areas, have made this possible. In FY25, growth can be faster than 6.5%—but only if private investment, public consumption, exports and agriculture output all increase rapidly, even as the government continues its capex focus.

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