India Q2 GDP Review: Brokerages Raise Growth Forecast

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

The gross domestic product has surprised on the upside for three consecutive quarters, indicating underlying strength in certain pockets of the economy, according to Morgan Stanley.

High-frequency data exhibits strength, real goods-and-services tax collections are tracking at 9.6% and real credit growth is at 13.7% on a year-to-date basis. The Purchasing Managers' Index has been above the 50 mark since July 2021, the financial services firm said in a note on Thursday.

The GDP grew 7.6% in the July–September quarter, lower than the 7.8% in April–June. The 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.

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

Even as Morgan Stanley expects year-on-year growth to moderate in the second half of the fiscal, driven by the base effect, the sequential run rate of growth will remain resilient, supported by domestic demand. "We expect the growth trend to be more broad-based, with consumption growth likely to recover, supported by moderating inflation and improving consumer sentiment."

• The research firm marks the GDP growth forecast for fiscal to market to 6.9% year-on-year from 6.4%, driven by robust domestic demand.

• Retains its growth estimate of 6.5% for the next fiscal.

• The demand-side breakdown showed government consumption rising the fastest at 12.4% YoY, followed by a pickup in gross fixed capital formation to a five-quarter high of 11%.

• Private consumption weakened to 3.1%, while net exports were less of a drag as exports grew marginally and imports growth slowed.

• On a compound-annual-growth-rate basis vs. 2019 (to remove pandemic disruptions), GDP growth continued to accelerate to 4.1% in the third quarter of 2023 from 3.2% in the second quarter of the calendar year. In the first half of the fiscal, GDP growth slowed to 7.7% from 9.5% in the year-ago period.

• Across sectors, industrial activity registered the sharpest growth at 13.4% YoY, reflecting a broad-based upturn within its components, predominantly manufacturing.

• Services weakened to 5.8% year-on-year in the third quarter of 2023 as the growth momentum slowed meaningfully from the previous quarter for trade, hotels & transport and financial, real estate and professional services.

• Agriculture moderated to 1.2% year-on-year in the third quarter of 2023, reflecting the weaker food grain output for summer crops, as per the first advance estimate.

• Core GVA growth remained healthy at 8.4% in the third quarter of 2023 vs. 8.7% in the second quarter of 2023, exhibiting resilience in domestic demand.

• The fall in commodity prices has led to buoyant economic activity over the last few quarters. This has been visible in higher corporate margins, improved purchasing power and strong government tax collection.

• If oil prices stabilise at current levels, the 0.5-percentage-point boost to GDP growth from this front will peter away. If oil prices rise or fall from current levels, there will be an additional drag or boost to GDP growth.

• Falling FDI flows and some weakness in credit growth post-imposition of risk-weighted assets could be other sources of growth drag that need monitoring.

• Statistically speaking, there was a lingering low-base effect in the first-half GDP data, which is not there in the second half. That could lower GDP growth numbers too. The RBI also expects GDP growth in the second half to be 5.9%, lower than 7.7% in the first half.

• Even though government consumption was stronger than before, private consumption was much weaker. "We think a weak rural India has kept a lid on private consumption growth, making it weaker than investment."

• DBS revises up the fiscal 2024 GDP growth to 6.8% from the current 6.4%.

• Nominal GDP rose 9.1% year-on-year vs. 8% the quarter before as industry deflators eased.

• High-frequency indicators suggest that the positive momentum sustained in October–November, including core sector output, motor vehicle registrations, loan growth, government spending and power demand.

• The mismatch in festivities is likely to cause some disruption in the monthly profile, with the October–November average needed to gain a better handle on the underlying momentum. Urban demand is expected to fare well, with farm-rural demand still contingent on crop production.

• With general elections approaching, private sector investments are likely to be in the slow lane, while the government will seek to frontload capex commitments before the turn of the fiscal year, notwithstanding the need for more current expenditure ahead of the polls.

• "Our GDP Nowcast model suggests growth is likely to be above 6.0% in 4Q/3QFY24," it said.

• Nomura has raised FY24 GDP growth to 6.7% from 5.9%.

• The research firm maintains expectation of a moderation to 5.6% in FY25 due to a slowdown in public capex ahead of the election, continued sluggishness in rural demand and private capex, waning terms of trade tailwind, and our house view of a synchronised global growth slowdown.

• Considering the continued core disinflation, GDP data are unlikely to change the monetary policy playbook, even as the RBI will likely inch up its FY24 GDP growth forecast of 6.5% to 6.6–6.7%.

• "We expect a continued policy pause amid hawkish talk. We maintain our baseline view of 100 basis point of cumulative policy rate cuts in 2024. However, amid resilient near-term growth, we are pushing out the timing of the first cut to August (from April)," it said.

• Nirmal Bang has raised the FY24 GDP estimate to 6.5% from 6.2% earlier to reflect the better-than-expected growth in the second quarter.

• GDP growth in the first half of the fiscal stood at 7.7%, but it is likely to slow to 5.4% in the second half.

• Lead indicators for October have been robust, supported by the festive season, but November has seen some slack.

• Slack in consumption after the holiday season, an anticipated slowdown in credit growth and reduced capex intensity ahead of the election, particularly given the front-loading of capex, are all likely to weigh on growth.

• Motilal Oswal Financial Services has revised FY24 growth up to 6.5–6.6%

• GDP growth remained robust, led by higher domestic demand. On the expenditure side, the government consumption and investments provided a cushion to the real GDP growth.

• However, weaker private consumption growth is surprising and worrisome. On the production side, the industrial sector remained robust, while the farm sector deteriorated. Overall, India's GDP growth remains extremely strong.

• At 7.7% real growth in the first half, it is almost certain that the full-year growth will be revised upward once again, probably to 6.5–6.6%