India’s GDP growth to ease in Q3 & Q4; Capex to remain tepid in run up to general elections: ICRA’s Aditi Nayar

India's gross domestic product (GDP) for the October-December quarter of fiscal 2023-24 (Q3FY24) will be released on Thursday, February 29, amidst an actively disinflationary monetary policy stance by the Reserve Bank of India (RBI) - aimed at supporting economic growth. 

The central bank's monetary policy committee (MPC) kept the benchmark repo rate steady at 6.5 per cent for the sixth consecutive meeting on February 8, 2024, and also decided to remain focused on the withdrawal of accommodation.

In its latest minutes-of-the-meeting, RBI Governor Shaktikanta Das said that the current setting of monetary policy is moving in the right direction, with growth holding firm and inflation trending down to the target. 

Also Read: RBI MPC Minutes: Job on inflation front not over, ‘last mile’ of disinflation can be sticky; 5 key highlights

"At this juncture, monetary policy must remain vigilant and not assume that our job on the inflation front is over. We must remain committed to successfully navigating the ‘last mile’ of disinflation which can be sticky,'' said Das.

As markets are front-running central banks in anticipation of policy pivots, any premature move may undermine the success achieved so far. Price and financial stability are essential to sustain a long haul of high growth. Policy imperative at the current juncture is to remain focused on achieving the four per cent inflation target on a durable basis, keeping in mind the objective of growth, explained Das.

In the current economic scenario, the International Monetary Fund (IMF) last month, upgraded India’s growth outlook on the back of better-than-expected resilience in its domestic demand. IMF now expects India’s GDP to grow by 6.7 per cent in FY24, 40 basis points higher than its previous forecast of 6.3 per cent given in the October 2023 update. One basis point is one-hundredth of a per cent.

Also Read: India remains fastest-growing major economy, Q2 GDP growth beats RBI estimates: 5 key takeaways

In the preceding July-September quarter of the current fiscal (Q2FY24), the Indian economy grew 7.6 per cent remaining the fastest-growing major economy in the world, according to GDP data released in November 2023. The rise in GDP growth was supported by government spending and robust performance in manufacturing, mining, and construction sectors.

Meanwhile, several brokerage reports and analysts are predicting that India's GDP growth in Q3FY24 likely moderated from the 7.6 per cent growth logged in Q2FY24. Aditi Nayar, Chief Economist, Head- Research & Outreach at leading credit rating agency ICRA in an interview to Mint's Nikita Prasad, said that India's GDP growth will moderate to six per cent in Q3FY24 dragged by lower output of kharif crops and slowdown in the industrial sector. 

The economy will likely ease in Q4FY24 as well, according to the economist. Nayar added that the government capex is likely to remain tepid in the run-up to general elections in May 2024. Here's what the lead economist expects from the upcoming GDP data and what she foresees for the Indian economy in the near-term:

Edited excerpts from the interview:

1. Reports suggest that India's Q3FY24 GDP growth is likely to ease sequentially compared to the 7.6 per cent growth logged in Q2. What's the Q3 GDP growth figure that you estimate? Which sectors will likely be the high-growth drivers and the ones contributing to a slowdown?

We have projected the year-on-year (YoY) growth of the GDP to ease to six per cent in Q3 FY2024 from 7.6 per cent in Q2 FY2024. Further, the GVA growth is estimated to moderate to six per cent in Q3 FY2024 from 7.4 per cent in Q2 FY2024, driven by the industrial and agriculture sectors, amidst an improvement in services.

Owing to the decline in output across all major kharif crops projected by the First Advance Estimates, ICRA projects the agriculture, forestry, and fishing to dip to witness a sub-1 per cent growth in Q3 FY2024. 

Besides, the anticipated deterioration in the industrial sector growth in Q3 FY2024 is partly attributable to an adverse base effect and a deceleration in volume expansion, even as the continued deflation in commodity prices kept profitability of some sectors favourable. 

Additionally, a mild 0.2 per cent contraction in the total spending of the central government and 25 state governments (all states except Arunachal Pradesh, Goa and Manipur) in Q3 FY2024 (+18.3 per cent in Q2 FY2024) is expected to have dulled the GVA growth in the quarter.

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2. Government spending rose 12.4 per cent in Q2, while private consumption missed estimates. Where will these two parameters stand in Q3 and which sectors will be most affected in case of a lower government expenditure?

The central government's non-interest revenue expenditure contracted by a significant 19.1 per cent in Q3 FY2024, after having expanded by 23.2 per cent in the prior quarter. Moreover, the combined revenue expenditure of 25 state governments witnessed a lower YoY growth of 7.5 per cent in Q3 FY2024, compared to 10.7 per cent in Q2 FY2024. This is expected to dampen the performance of the public administration, defence and other services (to +5 per cent from +7.6 per cent) component of the services sector.

Private consumption remains uneven, with urban sentiment appearing more robust than rural demand, following the uneven monsoon. This is expected to dampen the growth of the manufacturing sector in Q3 FY2024. Urban demand itself appears mixed as well. In ICRA’s view, the high-income households and new entrants into the formal labour markets, that have a relatively high propensity to consume, would continue to drive urban demand in the next fiscal. 

Besides, the consumption of low income and middle-age middle-income households is also likely to rise modestly, amid expectations of a cooling in the inflation in essential food items. However, the recent tightening of norms for personal loans and credit cards by the RBI could adversely impact credit growth for these segments, which may weigh on discretionary consumption of urban households.

Also Read: India Ratings expects GDP growth to slow to 6.5% in FY25

3. India's monetary policy continues to be actively disinflationary to achieve the four per cent target, while geopolitical conflicts and food price shocks remain key sources of upside risks. What's the overall impact of food price rise do you foresee on India's inflation trajectory in FY24? Will it align with RBI's estimate of 5.4 per cent?

We expect the CPI inflation to ease below five per cent in February-March 2024, resulting in an average inflation of 5.3 per cent for FY2024.

The food inflation trajectory is likely to take cue from the progress of summer sowing, outcomes of rabi harvest in the backdrop of the ongoing El Nino conditions, and impact of weather conditions on supply of perishables. A normal and well-distributed monsoon in 2024 is key to improve the prospects for agri output and keep food prices in check during the next fiscal. 

However, the core-CPI inflation is expected to remain subdued in the near term, auguring well for the headline print. Overall, ICRA projects the average CPI inflation to soften to 4.6 per cent in FY2025 from 5.3 per cent in FY2024, assuming a normal monsoon in 2024.

4. RBI Governor Shaktikanta Das said that the current policy is focused on anchoring inflation and sustaining a long haul of high growth. Going forward, do you think it will be a challenge for the RBI to devise its FY25 policy - which is focused on controlling inflation, considering the attached potential risk to growth outlook? When do you foresee a rate cut this year?

We expect GDP to grow by 6.2 per cent in FY2025, after rising by 6.6 per cent in FY2024. The decline in output of major kharif crops and weak prospects for rabi crop in the current fiscal, are expected to dampen rural sentiments and consumption in early-FY2025, until there is some visibility around the outcomes for the next kharif crop. 

Additionally, the recent tightening of norms for personal loans and credit cards by the RBI, is likely to impact credit growth for these segments, which could also weigh on discretionary consumption of urban households.

We concur with the MPC’s assessment around the pre-conditions for the kick-off of a private capex cycle being in place. However, we do not expect an improvement in external demand or exports to contribute significantly to GDP growth in FY2025. In the Interim Budget for 2024-25, the government expanded its on-budget capex by 16.9 per cent in FY2025; however, we are apprehensive the capex could be tepid in the run up to the Parliamentary Elections. 

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Once the full budget is presented, presumably in July 2024, the monsoon would be underway, which typically tempers the pace of capex. Accordingly, we are circumspect about the pace of growth of economic activity in H1 FY2025.

Overall, the MPC’s expectations around the growth outlook and its forecast that the CPI inflation will ease in FY2025, while remaining above the four per cent target, reinforces our view of a likely shallow rate cut cycle. ICRA foresees a rate cut cycle of 50-75 bps to commence in the August 2024 policy meeting, with a stance change in the preceding review, after there is some visibility on the monsoon turnout.
 

5. India remained the fastest-growing major economy in Q2 and the growth was sharply above RBI estimates. Will the Indian economy maintain its winning streak after the Q3 print? To conclude, what's your GDP growth estimate for the entire fiscal FY24?

While we expect the Indian GDP growth to remain healthy compared to the global trends, we do expect the pace to moderate in Q3 as well as in Q4. Based on the available trends, we foresee a GDP expansion of 6.6 per cent in FY2024.

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