Q1-FY24 real GDP grows at a robust 7.8% on services impetus

1 Sep 2023 , 09:54 AM

The MOSPI put out the first quarter real GDP growth and nominal GDP growth; apart from the GVA growth for the June 2023 quarter at 7.8%. The MOSPI typically announces the GDP figures, two months after the completion of the quarter. So, the next GDP announcement for September 2023 quarter will be announced on the last working day of November 2023. The spike in GDP growth in the first quarter ended June 2023, was largely triggered by a bounce in the services sector. While the agricultural sector stayed robust and improved its contribution to the GDP, the manufacturing sector lagged due to pressure from weak exports amidst fears of a global slowdown. 

Even within the services sector, the big thrust to GDP growth in Q1-FY24 came from the retail trade / hotels segment, the financial and professional services segment, and the construction segment. Agricultural growth continues to impress at 3.5%, but the tepid performance of the manufacturing sector has been more than compensated by the robust growth in the services sector. With the real GDP growing at 7.8% and the nominal GDP at 8.0% in Q1-FY24, there is no debate on which is the fastest growing large sized economy in the world. If you look at economies with GDP of more than $1 trillion, it is India that has been the clear winner in a very difficult global environment. 

How the Real GVA and Real GDP growth panned out for Q1FY24?

In the last few years, the government and MOSPI has been increasingly using the gross value added (GVA) in lieu of the GDP. Now GVA is the GDP growth without the adjustment for taxes and subsidies. Hence, the GVA tends to give a more unbiased picture of economic growth. However, with the impact of taxes and subsidies largely neutralized in the June 2023 quarter, the GVA growth and the real GDP growth are almost at par. Normally, the GDP is the starting point for calculation of GVA. However, from the GDP, the impact of indirect taxes and subsidies are eliminated to get GVA. Shorn of subsidies and indirect taxes, it shows value addition, without the impact of government action. The table below captures the real GVA and real GDP trend for the first quarter of the last 3 financial years viz. FY21, FY22 and FY23. YOY growth of FY23 and FY24 have been shown for the sake of comparison.

Sectoral Classification of Real GDP	Q1-FY22	Q1-FY23	Q1-FY24	Q1FY23 (YOY growth)	Q1FY24 (YOY growth)
1. Agriculture, Forestry & Fishing	4,84,982	4,96,547	5,13,946	2.4%	3.5%
2. Mining & Quarrying	75,606	82,809	87,587	9.5%	5.8%
3. Manufacturing	6,00,990	6,37,520	6,67,770	6.1%	4.7%
4. Electricity, Gas, Water Supply	78,422	90,134	92,704	14.9%	2.9%
5. Construction	2,38,390	2,76,648	2,98,393	16.0%	7.9%
6. Trade, Hotels, Transport	4,73,100	5,94,803	6,49,560	25.7%	9.2%
7. Financial, Real Estate & Services	8,12,166	8,81,599	9,89,293	8.5%	12.2%
8. Public Administration, Defence	3,62,621	4,39,780	4,74,678	21.3%	7.9%
GVA at Basic Prices	31,26,277	34,99,841	37,73,932	11.9%	7.8%
Impact of taxes	1,84,773	2,44,445	2,63,212	32.3%	7.7%
Real GDP Growth	33,11,050	37,44,285	40,37,144	13.1%	7.8%

Data Source: MOSPI (absolute figures in ₹ crore)

So, what are the key takeaways from the GVA data for the latest quarter? The GVA growth in Q1-FY24 at 7.8% is impressive as it comes on a FY22 growth base of 13.1%. In absolute terms, the GVA at Rs37.74 trillion for Q1-FY24 is higher than the GVA of Rs35.00 trillion in Q1-FY23 by 7.8%. This comes on top of the 11.9% growth in GVA in Q1-FY23. If you look at the real GDP data, then the real GDP for Q1-FY24 stands at Rs40.37 trillion, which has grown 7.8% over the real GDP level of Rs37.44 trillion in Q1-FY23. The 7.8% real GDP growth comes on top of the 13.1% real GDP growth in the previous year; so, on a fairly higher base.

What is of real interest is the actual break of this 7.8% growth in gross value added (GVA). Agricultural GVA growth has been robust at 3.5% in Q1-FY24 compared to just 2.4% in Q1-FY23. Despite weak Kharif output, the overall food grain production continued at record levels as the Rabi crop had a positive lag effect in the first quarter. The disappointment came from manufacturing which fell to just 4.7% growth in Q1-FY24 compared to 6.1% in Q1-FY23. If you break down the pressure on manufacturing, most of the pressure has come from the export drive sectors like textiles, gems & jewellery, jute, cotton etc. 

The slowdown concerns took a toll on exports, even as higher interest rates put pressure on corporate performance. It was a double whammy for industrials as they were squeezed by operating costs on one side and higher interest rates on the other. The positive feature for manufacturing is that the cost of inputs tapered, boosting gross margins. But the big story was the sharply higher double-digit growth in the finance and real estate business. Contact intensive sectors like trade, hotels, transport, and construction witnessed strong growth and more than compensated for the weakness in manufacturing. Government spending was largely static, as the thrust on capex was offset by tepid spending on revenue items.

Inflation impact on GDP is largely neutralized in Q1-FY24

We will look at the inflation impact by comparing the nominal growth in GVA and GDP with the real growth in the GVA and GDP. After all, when nominal GDP is adjusted for inflation, you get real GDP. In the first quarter ended June 2023 (Q1-FY24), the impact of inflation has been largely neutralized. That explains why the real GDP growth at 7.8% and the nominal GDP growth at 8.0% are largely in sync with one another. That implies that the impact of inflation is largely being neutralized. That is evident even intuitively. The inflation had fallen  sharply to the 4.2% levels, before bouncing back to the 7.44% levels. However, most of this has been caused by the erratic monsoons and the El-Nino effect. Normally, when we talk about growth in GDP or GVA, it is always on real growth basis, net of inflation. However, one can understand the role of inflation by looking at the nominal growth. The table below captures the break-up of GDP growth in FY23, based on nominal GDP.

Sectoral Classification of Nominal GDP	Q1-FY22	Q1-FY23	Q1-FY24	Q1FY23 (YOY growth)	Q1FY24 (YOY growth)
1. Agriculture, Forestry & Fishing	8,72,793	10,15,128	10,59,396	16.3%	4.4%
2. Mining & Quarrying	91,001	1,54,669	1,54,894	70.0%	0.1%
3. Manufacturing	7,66,238	8,98,270	9,15,710	17.2%	1.9%
4. Electricity, Gas, Water Supply	1,23,337	1,72,879	1,95,036	40.2%	12.8%
5. Construction	3,50,983	4,65,749	4,95,487	32.7%	6.4%
6. Trade, Hotels, Transport, Comm	6,61,991	9,54,523	10,28,173	44.2%	7.7%
7. Financial, Real Estate & Services	11,68,482	14,04,530	15,74,816	20.2%	12.1%
8. Public Administration, Defence	6,58,736	8,43,869	9,59,141	28.1%	13.7%
GVA at Basic Prices	46,93,561	59,09,618	63,82,653	25.9%	8.0%
Net Taxes	4,30,285	6,32,286	6,83,881	46.9%	8.2%
Nominal GDP Growth	51,23,846	65,41,903	70,66,534	27.7%	8.0%

Data Source: MOSPI (absolute figures in ₹ crore)

Let us take a slightly longer perspective to grasp this point. Till the third quarter of FY23, inflation played a major role in depressing real growth in GDP, although nominal GDP was still growing an impressive levels. That was why the central banks across the world stayed obsessed with inflation control. However, the impact of inflation has reduced from the fourth quarter and for the full fiscal year FY23. Here is a sampler. While analysing the GDP data for Q4-FY23, we had hinted that the impact of inflation was reducing. In Q1-FY24, the impact of inflation has been almost fully neutralized due to the sharply lower inflation.

How has inflation impacted the various components of nominal and real GDP growth in Q1-FY24? Interestingly, the impact of inflation has been unfavourable for the agricultural sector, while it has been largely positive for the manufacturing sector. That can be explained by the fact that the manufacturing sector has benefited the most from falling input prices. In the case of the services sector, the impact of inflation has been relatively neutral. 

How the GDP break-up by expenditure component look in FY23

For looking at the key drivers of GDP, we compare some of the key triggers across the first quarter for FY24 with the first quarter of FY23. Here is the tabular analysis.

Nominal GDP – Spending Components	Q1-FY22	Q1-FY23	Q1-FY24	Q1FY23 (Share)	Q1FY24 (Share)
1. Private Final Consumption Expenditure	29,35,427	38,70,012	42,20,742	59.2%	59.7%
2. Government Final Consumption Expenditure	6,51,199	7,25,465	7,40,672	11.1%	10.5%
3. Gross Fixed Capital Formation (GFCF)	14,41,512	19,01,768	20,68,328	29.1%	29.3%
4. Changes in Stocks (CIS)	36,868	44,900	46,564	0.7%	0.7%
5. Valuables	30,068	49,802	44,029	0.8%	0.6%
6. Exports	11,23,062	15,21,093	15,12,899	23.3%	21.4%
7. Imports	11,61,467	17,69,479	16,78,426	27.0%	23.8%
8. Discrepancies	67,175	1,98,342	1,11,726	3.0%	1.6%
Nominal GDP	51,23,846	65,41,903	70,66,534	100.0%	100.0%

Data Source: MOSPI (absolute figures in ₹ crore)

Here we move away from GVA to look at GDP growth in Q1FY24 and Q1FY23. More importantly, we focus on the share of various components that trigger GDP growth. The broad message is that trade (which played a major role in the GDP movement has started to play a more subdued role in FY24. The impact of private final consumption and government driven spending in the first quarter of FY24 and FY23 have been almost at par. Government spending share has been slightly lower due to lower revenue spends, but the share of gross capital formation remains close to 30%. The big difference, as we stated earlier was that trade (imports plus exports) which had an impact of over 50% on overall GDP, has seen its impact share reduce to around 44%. That can be attributed to slowdown in world trade.

How will RBI read this GDP outlook?

Will the latest GDP numbers make the RBI more hawkish or dovish; or would be choose to stay neutral? Some of the growth concerns evidenced in the third quarter have been addressed in the fourth quarter and have been virtually eliminated in the first quarter of FY24. That is the good news. Also, the RBI efforts to aggressively curb inflation appears to have paid off since the impact of inflation on real GDP has been largely neutralized. With the RBI pausing on rates in April, June and August, the much bigger concern would be the spike in inflation to 7.44%. Soft landing and hard landing were never the issues in India. Growth in GDP was always going to be robust and the ecosystem was right. Going ahead, RBI may risk holding on to its neutral stance on rates for some more time. Of course, that would largely predicate on how much sticky the inflation eventually gets.