ICRA sees Q2 GDP growth at 7%, exceeding MPC estimates

Rating agency ICRA sees sequential moderation in GDP growth to 7 per cent in the July-September 2023 quarter from a level of 7.8 per cent in the first quarter this fiscal.

The GDP expansion in the second quarter is expected to exceed the Monetary Policy Committee’s (MPC’s) October 2023 projection of 6.5 per cent, Aditi Nayar, Chief Economist, Head - Research & Outreach, ICRA said.

The Gross Value Added (GVA) growth is estimated to ease to 6.8 per cent in Q2 FY2024 from 7.8 per cent in Q1 FY2024, driven by the services sector (to +8.2 per cent from +10.3 per cent) and agriculture (to +1.0 per cent from +3.5 per cent), amidst an improvement in the industry (to +6.6 per cent from +5.5 per cent).

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A normalising base and an erratic monsoon are expected to result in a sequential moderation in the GDP growth to 7.0 per cent in Q2 FY2024 from 7.8 per cent in Q1 FY2024, Nayar added.

Looking ahead, uneven rainfall, narrowing differentials with year-ago commodity prices, the possible slowdown in momentum of government capex as we approach the parliamentary elections, weak external demand, and the cumulative impact of monetary tightening are likely to translate into lower GDP growth in H2 FY2024. 

As a result, we maintain our FY2024 GDP growth estimate at 6.0 per cent, lower than the MPC’s projection of 6.5 per cent for the fiscal”, Nayar added.

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India’s investment activity was quite robust in Q2 FY2024. The y-o-y growth performance of seven of the 11 investment-related indicators improved in Q2 FY2024 relative to Q1 FY2024. 

While the y-o-y growth in the remaining four indicators weakened in Q2 FY2024 relative to Q1, all of them witnessed a double-digit expansion in the quarter, including the CV registrations (+13.5 per cent), cement production (+10.2 per cent), the states’ capital outlay and net lending (+33.5)per cent, and the Government of India’s (GoI’s) capex (+26.4 per cent).

The aggregate capital outlay and net lending of 25 State governments, for which the CAG data is available, rose to ₹1.7 lakh crore in Q2 FY2024 from ₹1.2 lakh crore in Q1 FY2024. 

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Although the pace of y-o-y expansion halved to 33.5 per cent from 75.0 per cent, respectively, it remained robust, benefitting from an early transfer of funds under the interest-free capex loan scheme and front-loaded tax devolution. 

While the Centre’s gross capital expenditure rose by 26.4 per cent y-o-y to ₹2.1 lakh crore in Q2 FY2024, it trailed the ₹2.8 lakh crore seen in Q1 FY2024 (y-o-y: +59.1 per cent), amidst the monsoons.

ICRA estimates the industrial GVA growth to have risen to 6.6 per cent in Q2 FY2024 from 5.5 per cent in Q1 FY2024, boosted by manufacturing, electricity, and mining. 

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ICRA projects manufacturing GVA growth to witness an uptick to 5.5 per cent in Q2 FY2024 (-3.8 per cent in Q2 FY2023) from 4.7 per cent in Q1 FY2024 (+6.1 per cent in Q1 FY2023), benefitting from higher volumes and continuing albeit slower tailwinds from commodity prices.

Moreover, electricity generation witnessed a double-digit expansion of 11.1 per cent on a y-o-y basis in Q2 FY2024 (+1.3 per cent in Q1 FY2024), benefitting from the surge in electricity demand (to a five-quarter high of +11.7 per cent from +0.7 per cent; as per POSOCO data) owing to sub-par monsoon rainfall.

High-frequency data suggests that the momentum of construction activity remained healthy in Q2 FY2024, with the sub-par rainfall resulting in relatively lower disruptions in the quarter vis-à-vis what was typically seen in the past. 

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However, with a slowdown in national highway construction, the GVA growth of this sub-sector is likely to have eased to 7.0 per cent in Q2 FY2024 from 7.9 per cent in Q1 FY2024.

ICRA estimates the services GVA y-o-y growth to moderate to 8.2 per cent in Q2 FY2024 from 10.3 per cent in Q1 FY2024 on a normalising base. 

Owing to the decline in output across all Kharif crops projected by the First Advance Estimates, ICRA projects the growth in agriculture, forestry, and fishing to dip sharply to a muted 1.0 per cent in Q2 FY2024 (Q2 FY2023: +2.5 per cent) from 3.5 per cent in Q1 FY2024 (Q1 FY2023: +2.4 per cent). This would be the lowest growth print for the sector since Q4 FY2019 (-0.9 per cent).