India’s GDP growth is expected to jump to 8.5% in the first quarter of the current fiscal year (April-June). This is based on a recent report released by ICRA Ratings on Tuesday. This projection is higher than the 6.1% growth rate observed in the preceding quarter (January-March), with the growth attributed to a recovery in the services sector and a supportive base.
ICRA‘s chief economist Aditi Nayar explained factors that contributed to the positive forecast, such as continued catch-up in services demand, improved investment activity, and lower prices of various commodities. The agency also projected the gross fixed capital formation (GFCF) expansion in Q1 FY24 to be in double digits, based on strong year-on-year growth in investment-related indicators.
However, Nayar also warned of potential challenges in the second half of the fiscal year, including erratic rainfall and a possible slowdown in the momentum of government capex as the Parliamentary elections approach. These factors could limit growth, and ICRA maintained its 6% real GDP growth estimate for FY24, lower than the RBI’s 6.5%.
In the first quarter, challenges such as unseasonal heavy rains, the lagged effect of monetary tightening, and weak external demand exerted downward pressure on GDP growth. On the other hand, the June quarter saw growth boosted by factors such as a welcome front-loading in government capital expenditure and expanded margins in some sectors.
The capital outlay and net lending of 23 state governments (except Arunachal Pradesh, Assam, Goa, Manipur, and Meghalaya), and the government of India’s gross capital expenditure expanded sharply in Q1 FY24, reflecting increased investment activity.
External commercial borrowings related to capital expenditure also jumped to USD 13.0 billion in Q1, exceeding the full-year FY23 levels of USD 9.6 billion.
Additionally, ICRA estimated that the services’ gross value added growth increased to 9.7% in Q1 FY24, with 11 of the 14 high-frequency indicators in the services sector recording growth during the quarter.
Despite positive factors, growth in electricity generation dipped to an 11-quarter low of 1.3% in Q1 FY24, owing to an unfavorable base and excess rainfall during the quarter’s first half.
Overall, ICRA’s report paints an optimistic picture for India’s economic growth in the early part of FY24 while also emphasizing caution regarding potential headwinds in the latter half of the year. The insights provided offer valuable guidance for policymakers and industry stakeholders as they navigate the dynamic economic landscape.