Bengaluru, NFAPost: In a recent comprehensive report, ICRA Ratings delivered an optimistic outlook for India’s economic growth in the first quarter of fiscal year 2023 (FY24). The report anticipates a robust Gross Domestic Product (GDP) growth of 8.5% during the April-June period, marking a significant upswing from the 6.1% growth recorded in the previous quarter (January-March). This expected surge in growth is attributed to several factors, including a favourable base effect and a notable resurgence in the services sector.
Key Drivers of Optimism: Base Effect and Services Sector Rebound
The projected 8.5% growth for Q1 FY24 hinges on two pivotal factors:
- Supportive Base Effect: The growth rate is set to benefit from a supportive base effect, meaning that it will be compared against a lower growth rate in the same period of the previous year.
- Services Sector Recovery: The services sector, a vital contributor to India’s economy, is poised for a significant recovery. The report suggests that continued improvement in services demand and increased investment activity have contributed positively to this growth.
Divergence from RBI’s Forecast and Potential Challenges Ahead
While ICRA’s growth projection for Q1 FY24 surpasses the Reserve Bank of India’s (RBI) forecast of 8.1%, it also sheds light on potential headwinds in the latter half of the fiscal year:
- Upcoming Headwinds: The report cautions about potential headwinds that could potentially temper the overall growth trajectory.
- Factors Contributing to Headwinds: Challenges such as erratic rainfall patterns, narrowing differentials with commodity prices compared to the previous year, and a potential slowdown in government capital expenditure as parliamentary elections approach are identified as factors that could hinder sustained growth.
FY24 Growth Estimate and Influencing Factors
ICRA’s Chief Economist, Aditi Nayar, maintains her estimate of 6% real GDP growth for the full fiscal year FY24, which is slightly below RBI’s forecast of 6.5%. Several reasons underpin this estimate:
- Risks to Growth: The previously mentioned headwinds, including uncertainties related to monsoons and potential disruptions in commodity prices, are expected to limit overall growth.
- Government Capital Expenditure Impact: As the country approaches parliamentary elections, the momentum of government capital expenditure is likely to be affected, potentially impacting overall economic growth.
Sectoral Analysis: Services Sector and Capital Expenditure
- Services Sector Growth: The report underscores robust growth in the services sector, with services’ gross value-added growth expected to surge to 9.7% in Q1 FY24 from 6.9% in Q4 FY23. Impressively, 11 out of 14 high-frequency indicators associated with the services sector recorded positive growth during the quarter.
- Capital Expenditure Expansion: Q1 FY24 is anticipated to witness a double-digit expansion in gross fixed capital formation (GFCF). This projection is grounded in the strong year-on-year growth performance of various investment-related indicators.
- Government Capital Expenditure: The report highlights a substantial increase in the aggregate capital outlay and net lending by 23 state governments and the Government of India for Q1 FY24. These figures indicate remarkable growth of 76% and 59.1%, respectively, signifying an uptick in capital expenditure.
Electricity Generation and External Borrowings
- Electricity Generation Decline: Despite growth in many sectors, electricity generation registered a dip, reaching an 11-quarter low of 1.3% in Q1 FY24. This decline is attributed to an unfavourable base effect and excessive rainfall during the first half of the quarter.
- Capex-Related Borrowings: External commercial borrowings for capital expenditure, aimed at modernization and new projects, witnessed a significant upswing in Q1 FY24, surpassing the levels of the entire FY23.
- Commodity Price Impact: Lower prices of various commodities have expanded profit margins in certain sectors, contributing to the observed growth during the quarter.
In conclusion, ICRA Ratings’ optimistic projection for India’s economic growth in Q1 FY24, driven by a supportive base effect and a resurgent services sector, bodes well for the nation’s economic prospects. However, the report cautiously flags potential challenges and headwinds that could influence the growth trajectory in the latter part of the fiscal year.
