New Delhi: The second advanced estimates of the current financial year’s GDP growth surprised many economic pundits as several agencies and economists have expected a marginal slowdown in the GDP growth during the third quarter of the financial year, expecting the third quarter growth in the range of 6.6-6.9 percent.
However, there are several factors that resulted in higher GDP growth rate than anticipated as it has been estimated to grow at a much higher rate of 8.4 percent during October-December period last year. India Ratings and Research, a Fitch Group rating agency, said the GDP growth for the third quarter of the current financial year came in at 8.4 percent, much higher than its projection of 6.46 percent.
It said the GDP growth of 3QFY23 has been revised downwards to 4.3 percent as against earlier 4.5 percent. “Besides, this downward revision, the other factor that seems to have contributed to the third quarter of the current financial year GDP growth is non-pass through of lower input cost by the industrial sector as despite modest volume growth much higher value-added growth has been recorded in the industrial sector,” it said in a statement sent to ETV Bharat.
The agency said this volume and value added disconnect of industrial sector is also playing out in the higher wedge between GVA and GDP growth as the difference between the two is net taxes. “Non-pass through of lower input cost has resulted in higher corporate profitability and higher payment of taxes.”
Most demand side drivers also exhibited growth in Q3
In the third quarter of the current financial year, all demand side drivers barring government final consumption expenditure (GFCE) witnessed growth, showed the official data. The Private Final Consumption Expenditure (PFCE) grew at 3.5 percent on the year-on-year basis in 3QFY23, it was 2.4 percent on the year-on-year basis in the second quarter. The agency said it has been highlighting that the weakness in the consumption demand is due to its skewed nature towards goods and services largely consumed by the households belonging to the upper income bracket. “Therefore, it is not broad-based and recovery in consumption demand on sustained basis will be a challenge,” it said.
Services export saving the day
According to the agency, although exports despite global headwinds recorded a on the year-on-year basis growth of 3.4 percent, it is largely driven by services exports. India’s merchandise exports, in rupee terms, after witnessing subdued growth in the past two quarters picked up to 2.5 percent on the year-on-year basis in the third quarter of the current financial year. On the other hand, services exports (in rupee terms) grew 6.2 percent on the year-on-year basis in the same period.
Government expenditure shrinks
The data showed that the Government’s Final Consumption Expenditure (GFCE) fell by 3.2 percent on the year-on-year basis in the third quarter of the current financial year as governments have shown restrain on revenue expenditure. However, a robust growth of 10.6 percent on the year-on-year basis in GFCF in the third quarter of the current financial year shows continuation of capital expenditure by the government.
Public capital expenditure surges
The government capex, which includes the capital expenditure by the Centre and 25 states, increased by a 40 percent on the year-on-year basis in the third quarter of the current financial year from 26.7 percent on the year-on-year basis in the previous quarter.
Supply side factors
On the supply side, India’s agriculture sector is looking at a difficult time. Hit by the uneven monsoon caused by the El-Nino, India’s farm sector contracted by 0.8 percent on the year-on-year basis after a gap of 18 quarters in the third quarter of the current financial year.
Industrial sector which grew at 13.6 percent on the year-on-year basis in the second quarter, continued its good run even in the third quarter of the current financial year and recorded a on the year-on-year basis growth of 10.4 percent.
Manufacturing sector
According to Sunil Sinha, Senior Director & Principal Economist of India Ratings, said the most encouraging number came from manufacturing which grew by 11.6 percent on the year-on-year basis in the third quarter of the current financial year.
Amongst other segments of industrial sector, construction grew by 9.5 percent on the year-on-year basis, followed by electricity/utility services at 9.0 percent on the year-on-year basis in the third quarter of the current financial year.
Services sector
Services, the largest component of GDP, picked pace and grew by 7.0 percent on the year-on-year basis in the third quarter of the current financial year, up from 6.0 percent on the year-on-year basis in 2QFY24. Some of its segments, which due to contact intensive nature recovered late, have shown resilience in the recent times. For example, its largest component trade, hotels, transport and communication grew at 6.7 percent on the year-on-year basis in the third quarter of the current financial year.
The other two components namely - financial, real estate and professional services and public administration clocked a growth of 7.0 percent on the year-on-year basis and 7.5 percent on the year-on-year basis respectively in the third quarter of the current financial year. The second advanced estimate of national income has pegged the FY24 GDP growth at 7.6 percent on the year-on-year basis.
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