Q2FY24 real GDP growth beats street estimates at 7.6%

1 Dec 2023 , 09:14 AM

The core sector had been consistently above 8% for the last 5 months in a row and that was giving adequate indications that the GDP growth was also likely to be better than expected. For the second quarter ended September 2023, the real GDP growth has come in at 7.6%, while the real GVA growth has come in at 7.4%. The street estimate was around 6.8% to 7.0%; and these were the most optimistic estimates. Clearly, the GDP story appears to be a lot more robust at the grassroot level than most of the analysts and economists appear to be willing to concede. This is the third consecutive quarter of a positive surprise; and that is likely to have a positive impact on the overall macro and market sentiments next week.

It is not just the real GDP and GVA growth that has been impressive at 7.6% and 7.4% respectively. Even the nominal GDP (real GDP gross of inflation) has seen robust growth of 9.1% in Q2FY24 while the nominal GVA in the second quarter has grown at a robust 9.0%. What this means is that the GDP estimates are likely to seek an upgrade across the board and the RBI may also be one of the first to upgrade the GDP estimate for FY24 from its current 6.5% to closer to 7.0%. RBI could well announce this upgrade in their policy statement on December 08, 2023. There was a small change in this quarter. The agricultural sector lagged due to the lag effect of weak exports and rural strain. However, that was more than made up a thrust to manufacturing and most of the services. For the first half, the nominal GDP is expected to grow at 8.6% and the real GDP is estimated to grow at around 7.7% in H1FY24.Clearly, India is likely to consolidate its position as the fastest growing large economy with GDP above $1 trillion.

Charting Real GVA and Real GDP growth out for Q2FY24?

The table below captures the real GDP growth and its components for the first and second quarter of FY24 with a yoy comparison as well as a sequential comparison.

Industry	GVA at Basic Price
2021-22	2022-23	2023-24	(% Change YOY)
2022-23	2023-24
Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2
Agriculture	4,84,982	4,19,687	4,96,547	4,30,119	5,13,946	4,35,371	2.4	2.5	3.5	1.2
Mining	75,606	64,853	82,809	64,773	87,587	71,229	9.5	-0.1	5.8	10.0
Manufacturing	6,00,990	6,53,141	6,37,520	6,28,098	6,67,770	7,15,465	6.1	-3.8	4.7	13.9
Utility Services	78,422	82,533	90,134	87,449	92,704	96,249	14.9	6.0	2.9	10.1
Construction	2,38,390	2,54,755	2,76,648	2,69,185	2,98,393	3,04,938	16.0	5.7	7.9	13.3
Trade, Hotels	4,73,100	5,87,179	5,94,803	6,78,928	6,49,560	7,07,881	25.7	15.6	9.2	4.3
Financial SVCS	8,12,166	8,71,337	8,81,599	9,32,864	9,89,293	9,88,993	8.5	7.1	12.2	6.0
Public Admin	3,62,621	4,47,829	4,39,780	4,72,847	4,74,678	5,08,574	21.3	5.6	7.9	7.6
Real GVA	31,26,277	33,81,314	34,99,841	35,64,263	37,73,932	38,28,698	11.9	5.4	7.8	7.4
Net Taxes	1,84,773	2,70,345	2,44,445	3,13,738	2,63,212	3,45,613	32.3	16.1	7.7	10.2
Real GDP	33,11,050	36,51,659	37,44,285	38,78,000	40,37,144	41,74,312	13.1	6.2	7.8	7.6

Data Source: MOSPI (absolute figures in ₹ crore)

What do we decipher from the break up of the Q2 GVA and GDP growth. Here are some of the key takeaways.

• Real agricultural growth in Q2FY24 has clearly lagged at 1.2% as compared to 3.5% in the sequential first quarter of FY24 and also lower than 2.5% in the year ago quarter (Q2FY23). 

   

• Weak agricultural visibility can be attributed to weak monsoons, erratic droughts, supply chain bottlenecks, weak rural demand etc. That is not good news for food inflation and it is also not great news for rural demand.

   

• The star of the quarter was manufacturing, which grew at 13.9% in Q2. This can be partly helped by manufacturing contraction by -3.8% in the year ago quarter, but that is just part of the story. It is sharply higher than 4.7% in Q1FY24. 

   

• Much of the thrust to manufacturing came from the PLI scheme and other import substitution schemes for Indian manufacturing to capitalize on the supply chain gaps left by China. Clearly, manufacturing has been the driving force for GDP growth in Q2.

   

• Mining and utility services; both grew at 10% and the reasons are largely connected to each other. A surge on coal production has resulted in a surge in electricity generation and that is evident in the numbers. Looking at robust power demand, this growth looks to sustain in the near future.

   

• Trade and financial services showed positive growth but was nowhere close to the robust growth levels of Q1. That was the quarter of a bounce in demand as contact-intensive services had just come back in action. That has largely tapered out.

Overall, if one were to sum up, the thrust was led by manufacturing, mining and electricity with agriculture being the laggard. With elections coming up, this is a data point that the government would be concerned about.

 

Spending components of GDP for Q2FY24

The table below captures the break-up of real GDP in absolute terms in terms of the key expenditure components.

Expenditure Components	Expenditure Components of GDP
2021-22	2022-23	2023-24	Share in GDP (%)
2022-23	2023-24
Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2
Private Final Consumption	18,22,102	21,21,839	21,82,357	22,98,123	23,12,601	23,70,094	58.3	59.3	57.3	56.8
Government Spending	4,03,808	3,46,501	4,11,243	3,32,450	4,08,300	3,73,513	11.0	8.6	10.1	8.9
Fixed Capital Formation	10,77,836	12,09,609	12,97,588	13,25,580	14,00,832	14,71,938	34.7	34.2	34.7	35.3
Changes in Stocks	28,895	31,402	31,050	30,591	32,256	34,154	0.8	0.8	0.8	0.8
Valuables	22,035	1,34,378	34,959	1,08,206	27,633	1,03,901	0.9	2.8	0.7	2.5
Exports	7,65,031	8,26,729	9,15,111	9,27,872	8,44,252	9,68,011	24.4	23.9	20.9	23.2
Imports	7,49,401	8,73,014	10,01,571	10,74,495	11,02,748	12,53,860	26.7	27.7	27.3	30.0
Discrepancies	-59,256	-1,45,787	-1,26,452	-70,326	1,14,019	1,06,561	-3.4	-1.8	2.8	2.6
Real GDP	33,11,050	36,51,659	37,44,285	38,78,000	40,37,144	41,74,312	100.0	100.0	100.0	100.0
GDP   (% change)			13.1%	6.2%	7.8%	7.6%	N.A.	N.A.	N.A.	N.A.

Data Source: MOSPI (absolute figures in ₹ crore)

What were the specific heads of spending that triggered a sharply impressive GDP growth of 7.6% in the second quarter of FY24? Here are the takeaways.

• Private final consumption continued to dominate the real GDP growth story for Q2FY24 and accounted for well more than half the GDP story. However, the share of private final consumption is lower on a sequential basis and also sharply lower by 250 bps yoy.

   

• Government spending in Q2 is lower compared to Q1, but the good news is that gross capital formation has seen a bigger share in Q2. It is indicative of the fact that the government has been restraining revenue spending to ensure that capex is not impaired in the process. That is likely to be value accretive in the long run.

   

• The big contributor to the better than expected GDP growth in Q2FY24 is the trade; which is a combination of merchandise and services exports and imports. How is it having an impact. Exports overall are higher in share at 23.2% compared to 20.9% in Q1. That is because any weakness in merchandise exports is being compensated by robust service exports. Imports are also higher, but the sharp fall in commodity prices and the weakness in oil prices has had a positive impact on GDP for the second quarter.

What is the big story of the components of GDP for Q2. Private consumption spending is taking a hit as consumer are getting more defensive while the government has prioritized capex over revenue spending. That is good for the economy in the long run.

Nominal GDP tells you the best story of macro picture

Nominal GDP is the gross GDP before adjusting for inflation. When nominal GDP is adjusted for inflation, it becomes real GDP. Nominal GDP is relevant as it is the real barometer of the size of the economy

Industry	Nominal GDP and Nominal GVA
2021-22	2022-23	2023-24	Percentage Change Over Previous Year
2022-23	2023-24
Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2
Agriculture	8,72,793	7,71,303	10,15,128	8,76,513	10,59,396	9,39,940	16.3	13.6	4.4	7.2
Mining	91,001	83,748	1,54,669	1,18,172	1,54,894	1,31,352	70.0	41.1	0.1	11.2
Manufacturing	7,66,238	8,46,505	8,98,270	8,74,788	9,15,710	9,75,739	17.2	3.3	1.9	11.5
Utility Services	1,23,337	1,32,449	1,72,879	1,80,366	1,95,036	1,96,297	40.2	36.2	12.8	8.8
Construction	3,50,983	3,82,590	4,65,749	4,38,751	4,95,487	4,95,298	32.7	14.7	6.4	12.9
Trade, Hotels,	6,61,991	8,39,034	9,54,523	10,80,824	10,28,173	11,32,854	44.2	28.8	7.7	4.8
Financial SVCS	11,68,482	12,72,447	14,04,530	14,81,923	15,74,816	15,91,724	20.2	16.5	12.1	7.4
Public Admin	6,58,736	7,66,875	8,43,869	8,61,552	9,59,141	9,82,336	28.1	12.3	13.7	14.0
Nominal GVA	46,93,561	50,94,951	59,09,618	59,12,888	63,82,653	64,45,540	25.9	16.1	8.0	9.0
Net Taxes	4,30,285	5,08,875	6,32,286	6,54,061	6,83,881	7,20,616	46.9	28.5	8.2	10.2
Nominal GDP	51,23,846	56,03,826	65,41,903	65,66,949	70,66,534	71,66,157	27.7	17.2	8.0	9.1

Data Source: MOSPI (absolute figures in ₹ crore)

There are 3 things that emerge from the table of nominal GDP above, which is the GDP gross of inflation.

• The impact of inflation has been much more acute in Q2FY24. In Q1, the nominal GDP growth stood at 8% and the real GDP growth at 7.8%. In contrast, Q2 has seen nominal GDP growth of 9.1% and real GDP growth of just 7.6%. That is not surprising as the July to September quarter bore the brunt of the spike in food inflation. That means, in nominal terms, Q2 did much better than Q1.

   

• Public administration and defence have seen high levels of nominal growth but relatively moderate levels of real growth, indicating that the impact of inflation has been much stronger on this segment than on the others. Ironically, even in agriculture, the nominal growth in Q2 has been much higher compared to Q1 and it is only when the real GDP is considered that agricultural growth looks tepid in Q2FY24.

   

• If you consider the Q2 nominal GDP of Rs71.66 trillion and annualize it, India would be looking at overall full year GDP in the vicinity of $3.45 trillion to $3.55 trillion depending on how the last two quarters pan out. With the market cap of the BSE already at $4 trillion, there is surely some catching for GDP to do.

Nominal GDP story is quite clear. Mining, manufacturing, and construction continue to drive the GDP growth in Q2 and that looks like the paradigm for FY24 overall. 

How do nominal GVA and GDP estimates for first half FY24 look

The data for Q1 and Q2 of FY24 are already available and that makes it fairly simple to estimate how the Indian economy has done in the first half of FY24.

Industry	Nominal GDP and Nominal GVA for H1-FY24 (MOSPI Estimates)
First Half (H1-FY24)	Percentage Change Over Previous Year
2021-22	2022-23	2023-24
2022-23	2023-24
Agriculture	16,44,096	18,91,641	19,99,336	15.1	5.7
Mining	1,74,749	2,72,841	2,86,246	56.1	4.9
Manufacturing	16,12,742	17,73,057	18,91,450	9.9	6.7
Utility Services	2,55,786	3,53,245	3,91,333	38.1	10.8
Construction	7,33,573	9,04,499	9,90,785	23.3	9.5
Trade, Hotels	15,01,025	20,35,347	21,61,026	35.6	6.2
Financial Services	24,40,929	28,86,453	31,66,540	18.3	9.7
Public Admin	14,25,612	17,05,421	19,41,477	19.6	13.8
Nominal GVA	97,88,512	1,18,22,506	1,28,28,193	20.8	8.5
Net Taxes	9,39,160	12,86,347	14,04,497	37.0	9.2
Nominal GDP	1,07,27,672	1,31,08,853	1,42,32,690	22.2	8.6

Data Source: MOSPI (absolute figures in ₹ crore)

India looks all set to achieve nominal GDP of $3.5 trillion to $3.55 trillion in the full year FY24. It now looks like most of the analysts may have underestimated the Indian GDP growth story by a margin. One has to wait for the RBI monetary policy on December 08, 2023, where we could see the first official upgrade of full year GDP growth for FY24 from the current peg of 6.5% to closer to the 7% mark. Once the RBI does that, a slew of global multilateral agencies, rating agencies and even global brokers should follow suit. One thing is for sure. India is likely to remain the fastest growing large economy in the world for some time. For now, it is time to raise a toast to the surprisingly robust 7.6% GDP growth in Q2FY24.