India has solidified its position as the world's fastest-growing major economy, with real GDP surging to an impressive 7.8% YoY growth in the April-June 2023 quarter (Q1 FY24), the highest in the past four quarters.
This growth has propelled the country to an overall growth rate of 7% year-on-year in the first half of 2023, outpacing China's 5.4% growth for the same period.
The services sector, which constitutes roughly 53% of GDP, grew by 10.3% YoY in Q1 FY24 and is projected to grow more than 8% in FY24 (its average growth in the past 26 years), said domestic brokerage firm ICICI Securities in its latest report.
Manufacturing expanded by 4.7% YoY in Q1 FY24 but is likely to accelerate sharply in July-December 23 (benefiting from a low base and the impact of the production-linked incentives).
Aggregate demand will continue to be led by the acceleration in fixed investment spending, which increased by 8% YoY in Q1FY24 but is likely to strengthen as private investment complements the continued strength of public investment, according to the brokerage.
Furthermore, there was a slight fiscal deterioration in April–July 23, partly attributed to a significant 54% YoY surge in taxes allocated to states. This surge is expected to result in reduced assignments for the remainder of FY24, as indicated by the brokerage.
Seeming deterioration in fiscal balances likely to be reversed in H2FY24
"In July 2023, the 12-month moving average of the fiscal deficit expanded to 6.9% of GDP, raising concerns about our earlier projection that the deficit would moderate to 5.5% of GDP for FY24. Taxes assigned to states have not increased more than 12% YoY in any of the past 6 fiscal years, so we think the anomalous surge (+54% YoY) in April-July 2023 will be corrected in the rest of FY24."
"Direct tax revenue has also decelerated in January–July 2023 after two years of blistering growth (30% YoY in CY21, over 20% in CY22). Our hypothesis is that direct tax refunds have partially normalised this year (after a post-COVID decline in the past two years); if this proves correct, there should be a positive turnaround in direct tax revenue in H2FY24," said the brokerage.
The fiscal deficit in April–July 2023 was 33.9% of the FY24 target (vs 20.5% of the FY23 target for April–July 22). This year’s number is still far lower than the pre-covid figures for the first 4 months of the fiscal year. The deficit for April-July 2018 and April-July 2019 were 87% and 78% of the FY19 and FY20 deficit targets, respectively, the brokerage noted.
Net export discrepancy suggests scope for an upward revision to growth
The 7.8% YoY growth in Q1 FY24 real GDP, according to the brokerage was driven mainly by the 8% YoY rise in fixed investment spending, which marked the fifth consecutive quarter of 8% or higher growth in GFCF. Real PCE was up 6% YoY, and inventory restocking added 0.8% to GDP.
However, the brokerage said there was a statistical discrepancy equal to 2.8% of GDP, primarily reflecting the fact that real net exports showed an improbably large deficit of 6.4% of GDP and a nominal net exports deficit of 2.4% of GDP.
The goods and services trade data suggest a current account deficit of just 0.5% of GDP, so net exports will eventually be revised, imparting some scope for an upward revision to the real GDP growth for the quarter, it noted.
Moody's raises India's growth forecast
On Friday, global rating agency Moody's Investor Service raised India's growth projection for the 2023 calendar year to 6.7%, citing the upside to growth performance helped up robust underlying economic momentum, PTI reported.
In the Global Macro Outlook 2023–24 (August update), Moody's said strong services expansion and capital expenditures have propelled India's 7.8% real GDP growth in the second (April–June) quarter from a year ago.
"Given the robust underlying economic momentum, we also recognize further upside risk to India's economic growth performance, Moody's said while raising its 2023 calendar year growth forecast for India to 6.7% from 5.5%.
The global rating agency, however, lowered the 2024 growth forecast to 6.1% from 6.5%, citing a high base of 2023. In addition, Nomura research also raised India's GDP forecast to 5.9% for FY24.
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