India’s GDP growth is impressive, but can it be sustained?

Last Updated06/06/2024

it will be important for the new government to ensure that the benefits of high growth trickle down to the lower income categories
India’s GDP data was keenly awaited, Indeed, it has surpassed market expectations, with a growth of 8.2 per cent in 2023-24 as against 7 per cent in 2022-23.

It is to be noted that the growth in 2023-24 is much higher than MOSPI’s second advance estimate of 7.6 per cent.
While overall GDP growth is impressive, it is important to understand some of the nuances of the data to infer the sustainability of the growth this year.
Another important point is the sharp divergence of 1 percentage point between GDP and GVA growth in 2023-24.
- This is mainly because of sharp growth in net taxes (due to higher tax collection and lower subsidies). This has also aided in pushing up the GDP growth.
If we look at the sectoral break-up, as expected, overall agriculture value added growth has been muted, given the poor monsoon last year.
Supported by lower input prices, manufacturing GVA has shown a healthy recovery, with growth of 9.9 per cent in 2023-24.
While services sector growth has been healthy at 7.6 percent.
The construction sector has remained robust, recording a growth of 9.9 per cent

If we look at the break-up of GDP from the expenditure side, we find that the overall GDP growth is not very broad-based.
Private consumption, the main pillar of the economy, has grown by a feeble 3.8 per cent in 2023-24. This is the slowest consumption growth rate in the last two decades (excluding the pandemic year contraction).
Investment, the other pillar of the Indian economy, has grown by a healthy 9 per cent. Investment in the economy has been mainly led by the government sector.
Central government’s capex has grown by a healthy 28 per cent in 2023-24,

The third pillar of India’s economy has been muted due to weak global growth.
While India’s services exports have remained healthy, merchandise exports specifically felt the pinch of global slowdown.
We can expect India’s GDP growth to moderate. However, it is estimated to be still healthy at around 7 per cent this year.
For the growth momentum to be sustained, the most critical aspect would be an improvement in private consumption.
While the higher income category has been spending, the lower income category remains cautious amidst high inflation and low wage growth.
Rural demand had also been weak due to poor monsoon last year.
With normal monsoon expected this year, we can expect a revival in rural consumption demand.
Moderation in food inflation will be another prerequisite for rural consumption revival.
Improvement in the employment scenario will also be an important piece for consumption revival.
Improvement in the employment situation in the unorganised sector will also be critical.
A pick-up in the private capex cycle is another important requirement for sustained growth momentum.
The private sector is showing increasing intent to invest, as reflected by the CMIE data on investment projects announced.
Of course, a sustained revival in consumption demand would be most critical for private investment to pick up meaningfully.

With the global growth outlook improving, India’s exports are likely to improve.
However, with geo-political tensions brewing, the risk of supply shocks continues.
The recent uptick in global commodity prices, specifically industrial metals prices, could adversely impact the Indian economy through higher input cost.