And yet, whether one looks at the GDP or GVA, it has not touched the aspirational 7% mark or the Reserve Bank’s forecast of 7.1%.
CNBC-TV18 spoke with leading economists to understand key reasons for the slowdown in the first quarter and whether the 7% target looks achievable during the year.
Samiran Chakraborty, Chief Economist-India at Citi attributed the first quarter slowdown to two distortionary effects: elections and heat waves. While elections affected government consumption, the heat waves impacted agriculture.
Chakraborty believes that these effects will stabilise over the next few quarters, which could help close the gap to the desired 7% GDP growth.
However, Sonal Varma, MD & Chief Economist-India at Nomura Financial Advisory & Securities believes that while government consumption and agriculture-related activity will rebound, it may be an uphill task to achieve 7% growth.
Varma said there are a few factors that need to be considered while estimating growth.
First, the slowdown in the urban consumer side suggested by data for sectors like passenger vehicles, commercial vehicles, cement etc., in July and August. With signs of softness in the high-frequency data, credit growth is also expected to moderate.
Second, the fact that the big boost to GDP from corporate profitability from lower input costs is behind us.
Third, global demand is soft, whether it’s China, Europe, or even the US.
“It is likely that GDP growth and GVA growth will remain in the 6.5%-7% range in the next three quarters. So, we see it extremely unlikely that GDP is going to be at 7% or higher in FY25,” she said.
In a recent report, Nomura trimmed its FY25 GDP forecast to 6.7% from 6.9%.
Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership; Madhavi Arora, Lead Economist at Emkay Global Financial Services also shared their view.
These are verbatim excerpts of the interview.
Q: Should we call this a good number? Whether it’s 6.7 or 6.8 it’s falling short of the aspirational 7%.
Chakraborty: The way we have looked at this number is that the internals of the numbers are slightly better than what we had probably anticipated. There were two distortionary effects in this quarter, one from the elections, the other from the heat waves. The election impact primarily would have been felt on the government consumption expenditure and heat wave impact on agriculture.
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If you look at these two components only, the government consumption expenditure grew at minus 0.2% so contributed zero basis points to GDP growth, and agriculture contributed about 30 basis points (bps) to GDP growth. Now for both, the historical average contribution is about 30 bps and 60 bps, respectively.
If you think of a normalisation of these two factors over the next couple of quarters, then that gap between the 7% aspirational number that you were talking of and the reported number could easily be bridged. So, we sense that we should be going back to the 7% print very soon, once these two effects normalise.
Q: In your report, you are forecasting a lower GDP. You have brought down your forecasts.
Varma: We have cut FY25 from 6.9 to 6.7 and I would agree with what Chakraborty has said in terms of internals being better than the headline, and that some of the effects, particularly government spending, are going to normalise in the coming quarters, but that needs to be seen in the context of what is happening more broadly. And there are two-three things to keep in mind here.
One is, in our view, the urban consumer side is slowing. I pointed out that most of the high-frequency data we have got for July and now for August have been weak. Second, passenger vehicle sales are negative, we are seeing inventory buildup. Medium and heavy commercial vehicle sales, contracted again in August, cement demand week. So, we are seeing signs of softness and high-frequency data.
We think, one, credit growth is going to moderate, and some of the excess consumer demand on the urban side is going to moderate. Second, the big boost to GDP from corporate profitability because of lower input cost is behind us, and therefore GDP growth is likely to be lower and probably closer to gross value added (GVA) growth going forward. And third, global demand is soft, whether it’s China, Europe, or even the US on the labour market side, things are slowing at the margin, and that, we think is also going to be a headwind.
So, while government consumption, government spending and agriculture-related activity will rebound, it’s going to happen against this backdrop. Therefore, it is likely that GDP growth and GVA growth will remain in the 6.5%-7% range in the next three quarters. So, we see it extremely unlikely that GDP is going to be at 7% or higher in FY25.
Q: I was elated by the private final consumption number coming in at 7.5% almost. It was just 4% if you take the average for the last four quarters. Shouldn’t one be therefore banking on better rural recovery, leading to a better multiplier effect?
Upadhyay: The 4% private consumption growth in the second half of last year as well as for the full year was understated. Typically, there are measurement issues when you come to estimating the GDP internals. And if you look at the contribution of discrepancies, which were as high as 52% to overall GDP growth last year, that makes it very difficult to interpret these private consumption growth numbers with any sense of confidence.
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So, true consumption growth would have been higher, and you would get that sense looking at two-wheeler sales, which were up 14% last year. Passenger vehicle sales were up 22% last year. So, with indicators of discretionary consumption doing reasonably well, 4% growth looks somewhat of an anomaly. So, while growth has picked up there, we think this acceleration is also exaggerated.
That said, we do see signs that consumption recovery is broadening out. If you look at the social services work component on the GVA side, you do not get that breakup separately. But if you overlap the government consumption expenditure on the GDP side and view the public acquisition defence of the services on the GVA side, you see signs that overall consumption recovery is broadening out.
Yes, high-frequency data this quarter, and last quarter was mixed; urban consumption seems to have slowed down a bit. But overall theme-wise, with inflation slowing down, and rains also recovering from July onwards, we see reasons for cautious optimism on the consumption pattern.
For the entire discussion, watch the accompanying video
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