Economic Insights from Data Released on May 31st
The recent data release on May 31st offers several insights into the Indian economy’s performance in Q4 FY2024 and April 2024. Indian GDP grew by 7.8% in Q4 FY2024, a faster-than-anticipated rate, though it marked a four-quarter low. Despite this, the full-year GDP expansion reached an impressive 8.2%. The eight core industries saw improved growth, rising to 6.2% in April 2024 from 6.0% in March 2024, despite a slump in cement output.
Factors Influencing Q4 FY2024 GDP Growth
Although the headline growth numbers are promising, it’s essential to understand the reasons behind the GDP slowdown in Q4 FY2024 to predict FY2025 prospects. The sequential GDP slowdown was primarily due to investment activity, which is expected to pick up in H2 FY2025 after the Budget and monsoons. Private final consumption expenditure showed a modest 4.0% increase in Q4 FY2024, while government final consumption expenditure experienced a mild growth after a contraction in Q3.
Industrial Sector Drives Growth
The gross value added (GVA) growth decelerated sequentially to 6.3% in Q4 FY2024 from 6.8% in the previous quarter, driven mainly by the industrial sector due to a decline in volume growth and the diminishing benefits of low commodity prices. However, manufacturing and construction sectors maintained robust growth, exceeding 8.0% in Q4 FY2024. Growth in the trade, transport, and related services sectors also slowed in Q4 FY2024, as indicated by various lead indicators.
Agricultural Sector and Monsoon Impact
Agricultural GVA growth for Q3 FY2024 was revised upwards due to higher crop output in the Second Advance Estimates (AE) compared to the First AE. Nonetheless, the adverse effects of the 2023 monsoon persisted, resulting in a modest 0.6% year-on-year rise in agricultural GVA in Q4 FY2024.
Looking forward, the India Meteorological Department’s (IMD) forecast of an above-normal monsoon in 2024, coupled with the development of La Nina conditions, is expected to support the kharif crop output. However, excessive rainfall in short periods could negatively impact this. The replenishment of reservoir levels should benefit the rabi crop prospects, likely improving rural demand in H2 FY2025 as households gain clarity on farm cash flows from rabi procurement and monsoon outcomes.
Urban Consumption and Fiscal Dynamics
Urban consumption is anticipated to remain strong but uneven in FY2025, driven by high-income households and new entrants into formal labor markets. However, the RBI’s tighter norms for personal loans and credit cards could hinder credit growth in these segments, affecting discretionary consumption.
The Government of India’s fiscal deficit was contained at 5.6% of GDP, below the Revised Estimate (RE) for FY2024, thanks to higher-than-expected receipts and lower-than-anticipated revenue spending, with only a slight miss in capital expenditure. However, the fiscal deficit for April 2024 surged sharply, despite the ongoing Parliamentary elections, which usually curb spending. The higher-than-budgeted dividend from the Reserve Bank of India (RBI) is expected to ease the fiscal deficit for the rest of the quarter. The full-year Budget, likely presented in July 2024, will provide further direction for revenue and capital spending, influencing investment activity and government consumption expenditure for the year.
GDP and GVA Growth Alignment
The gap between GDP and GVA growth narrowed slightly to 148 basis points (bps) in Q4 FY2024 from 178 bps in Q3 FY2024, amid a high 22.2% growth in net indirect taxes in real terms, benefiting from contracting subsidies. With such high net indirect tax growth unlikely to sustain in FY2025, GDP and GVA growth rates are expected to converge, especially in annual terms (GDP 8.2% and GVA 7.2% in FY2024).
Given the transient factors likely to affect growth in H1 FY2025, GDP growth is expected to decelerate from the 8.2% recorded in FY2024 but remain robust, suggesting that monetary easing may be delayed further.