India's Q2 GDP Grows 7.6% Surpassing Estimates As Manufacturing Spikes

India's economy grew better than expected in the second quarter of FY24, driven by manufacturing and the government's spending push ahead of elections.

The gross domestic product grew 7.6% in the July–September quarter, lower than 7.8% in April–June, according to the latest estimates released by the government's statistical office on Thursday. Gross value added, which strips out indirect tax and subsidies, is estimated to have grown 7.4% as compared with 7.8% in the previous quarter.

GDP was estimated to grow 6.8% in Q2, according to 41 economists polled by Bloomberg. GVA growth was pegged at 6.8%.

The better-than-expected expansion was driven by manufacturing, which grew 13.9% as compared with a 4.7% rise in the prior quarter.

GDP growth for the second quarter of the fiscal has surprised markets at 7.6%, said Suman Chowdhury, chief economist at Acuité Ratings and Research. This has been driven by the acceleration in manufacturing sector led by robust performance of steel and cement sector, which reflects demand from infrastructure sector, lower inputs costs that have improved the profitability margin of the sector and steady domestic consumption demand in sectors such as auto, he said.

Gaura Sen Gupta, India economist at IDFC First Bank also said that the growth in manufacturing is led by jump in listed company profit, which were supported by rise in sales growth outpacing rise in input cost pressure. Construction sector growth remains robust, reflecting frontloading of capex by central and state government, while trade, hotel and transportation, which is a contact-intensive sector has slowed, despite pick up in individual travel and tourism-related expenditure.

On the other hand, the data doesn’t look good on the consumption side, largely due to a weakness in rural demand, reinforced by low growth in the agricultural sector, Chowdhury said. The growth in the various segments of services have also been moderate, reflecting a moderation of pent-up demand.

• Agriculture grew 1.2% in Q2 as compared with 3.5% in Q1.

• Mining grew 10%, up from 5.8% in the previous quarter.

• Manufacturing expanded 13.9% as against 4.7% in the prior quarter.

• Electricity and other public utilities expanded 10.1% versus 2.9%.

• Construction grew 13.3% as compared with 7.9% in Q1.

• Trade, hotels, transport, and communication expanded 4.3% versus 9.2%.

• The financial services sector grew 6% as against 12.2%.

• The public administration segment grew 7.6% as compared with 7.9% in Q1.

Expenditure Trends

• Private consumption, reflected in private final consumption expenditure, grew 3.1% as compared with 6% in Q1.

• Government final consumption expenditure rose 12.3% as compared with a contraction of 0.7% in Q1.

• Investments, as reflected by gross fixed capital formation, grew 11% as against a growth of 8% in the previous quarter.

The weakness in consumption demand was also reflected in private consumption expenditure, Sen Gupta said. High-frequency growth indicators showed that urban demand had held up, with jump in passenger vehicle sales, rise in air travel and personal loan growth and rise in FMCG sales volume.

That said, rural demand remains weak, reflecting low real wage growth and uneven monsoon, she cautioned. The impact of the latter is visible with employment demand under MGNREGA remaining higher than last year. From the expenditure side, discrepancies remain the key driver in contribution terms for the second consecutive quarter, Sen Gupta said. In Q2 FY24, it contributed 4.6 percentage points to overall GDP growth or 60% of overall growth, she added.

"Given the exceptionally strong growth print in Q2 FY24 and the average 7.7% YoY growth in H1 FY24, there is a rationale for a review of our 6.0% growth forecast for the full year," Chowdhury said. Nevertheless, the base factor will not be in action in the second half of the year and there are material risks of lower agricultural output and weaker rural consumption, he added.

In the coming MPC meeting, the RBI is expected to take note of the stronger growth momentum in the current year and the likelihood of a fresh build-up of inflationary pressure, particularly if food inflation gets affected by the El Nino weather events. However, any rate cut decision may be postponed further beyond the next 6-8 months, said Chowdhury.