Good start but…

India’s GDP for the April-June quarter grew 7.8% to ₹40.4 trillion, a shade lower than RBI’s estimate of 8% but in line with market expectations. This is likely to be the best quarter in terms of growth as RBI has projected economic momentum will slow down in the next three quarters and GDP will expand by 6.5% for the financial year 2023-24. This growth rate will still make India the fastest growing major economy and one of the main contributors to global GDP expansion.

Among the highlights of the first quarter GDP is the sequential increase in the pace of private consumption. It grew 6% to ₹23.1 lakh crore. In the last two quarters growth in consumption was significantly lower. However private consumption, which is the largest component of GDP, still lags overall GDP growth, indicating that a section of consumers hasn’t fully recovered from the economic shocks dealt by the pandemic. Yet again, investment was a bright spot. In the April-June quarter it grew 8% to ₹14 lakh crore. GOI’s fiscal stance has catalysed investment. It has led the way with a scorching pace of expansion in capital expenditure. In the June quarter, GOI’s capital expenditure increased 59% to ₹2.8 lakh crore.
In the remaining quarters sustaining this pace of capital expenditure will be challenging as tax collections have been weak. In the April-June quarter, gross tax revenue increased just 3.3% to ₹6.7 lakh crore, significantly lower than India’s nominal GDP growth of 8%. An important cause of weak tax collections is the lacklustre performance of the manufacturing sector that is battling a global slowdown, which has also undermined India’s merchandise exports. In the first quarter, manufacturing grew a mere 4.7% to ₹6.7 lakh crore. GDP’s performance on the production side was salvaged by a robust 12.2% growth in financial, real estate and professional services to ₹9.9 lakh crore.

Economic management in the second half of 2023-24 will be challenging on account of a combination of global economic slowdown and elevated food inflation. RBI’s analysis of inflation’s drivers shows that there’s no case to nudge up interest rates. GOI too needs to stick to its projected borrowings to ensure that it doesn’t push up interest rates, which will influence some private firms to postpone investments. Getting tax collections back on track in the second half is essential.

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