After consecutive quarters of muted growth, manufacturing sector has managed to be the highlight of India's GDP data in the July to September quarter. India's GDP growth in the second quarter came at 7.6 per cent, higher than the 6.2 per cent registered in the same period last year.
Amongst all the components, it was the manufacturing sector which posted the highest growth of 13.9 per cent in Q2, beating all estimates. The surge in industrial activity managed to lift the Indian economy in a quarter which saw headwinds to rural demand due to El Nino conditions.
Economists did not anticipate the huge positive upside to the GDP growth in the quarter. However, RBI governor Shaktikanta Das had said that the growth numbers would come as a surprise. "Looking at the momentum of economic activity and several early data points and indicators that have emerged, I can confidently say that the second quarter GDP figures, expected to be released at the end of November, in all probability will surprise everyone on the upside," Das said at a Business Standard conclave.
The central bank itself had predicted a 6.5 per cent growth in the second quarter. Rating agencies had also predicted a moderation in growth in the previous quarter. However, the growth numbers have thrown light on some interesting trends.
Manufacturing Surprise
In Q1 FY24, manufacturing had seen a muted growth of 4.7 per cent. The GDP growth of 7.8 per cent in the first quarter was driven by the services sector which had managed to post good numbers in high frequency indicators.
However, the picture seems to have flipped in the second quarter. While manufacturing posted a strong growth of 13.9 per cent, services sector lagged behind. Trade, hotels, transport and financial services saw a decline. Trade, hotels and transport growth rate fell from 15.6 per cent in Q2 FY23 to 4.3 per cent in Q2 FY24. Financial services also saw a decline from 7.1 per cent to 6 per cent in the same period.
Constructions also managed to post substantial growth of 13.3 per cent, as against the 5.7 per cent in Q2FY23. The strong performance of manufacturing and constructions has managed to lift the economy.
Sunil Sinha, Principal Economist and Senior Director – Public Finance and Paras Jasrai, Senior Analyst at India Ratings & Research, say, "A favourable base effect and benign input cost pressures helped the industrial sector. The construction sector is the second largest employer in the country and the sector’s strong growth is expected to help the employment generation in the country which otherwise has been a major concern."
In Q2 FY23, manufacturing sector's growth had declined by 3.8 per cent. While the low base effect has helped to a certain extent, double digit growth has come as a surprise. Analysts note that crowding in of state and central governments capex has been able to aide the growth of the sector.
Gross Fixed Capital Formation (GFCF) saw an increase in its share of GDP from 34.2 per cent in Q2FY23 to 35.3 per cent in Q2FY24. India Ratings noted in its analysis that the combined capex of state and central governments grew by 26.7 per cent in Q2FY24.
Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services, estimates that investments by corporate sector have managed to grow for the very first quarter in 2023. "India's investment rate rose to 32.9 per cent of GDP in Q2, better than 32.1 per cent of GDP in Q2FY23. Our calculations suggest that corporate investments grew 3.3 per cent YoY last quarter, after two declines," he notes.
Overall, heavy lifting by governments and a revival in corporate investments has helped the growth rate beat the estimates of economists. However, there were some worrying aspects which may moderate growth in the coming quarters.
Some Dark Clouds
In the Q2 data, services and agriculture sectors' growth has worried economists. Agriculture's growth slowed down from 2.5 per cent in Q2FY23 to 1.2 per cent in Q2FY24. In the first quarter, agriculture grew by 3.5 per cent.
Jasrai and Singh note, "Agricultural sector witnessed the slowest growth in 18 quarters in 2QFY24 indicative of the lacklustre kharif sowing season which was impacted by the advent of El-Nino. The below par growth in the agriculture sector implies that the rural demand is under stress which is preventing the consumption demand to be broad-based."
In the quarter, erratic monsoon pattern had hurt the sowing of several crops. In August, a deficiency of 13 per cent in all India monsoon was recorded by the India Meteorological Department (IMD).
Talking about the performance of services sector, Sakshi Gupta, Principal Economist at HDFC Bank, says, "The moderation in the growth of services sector isn't surprising as the slowdown had started in the previous quarter as well which wasn't visible to an extent due to base effect. The pent up demand in the country might be moderating which is reflected in the GDP number."
How the slowdown in agriculture and services would hit India's GDP growth remains to be seen in the coming quarter. At the moment, the expectation of 6.2-6.5 per cent GDP growth in the current fiscal might see upside revisions in the coming days. But analysts maintain that the next two quarters are likely to see a slowdown in GDP growth owing to global headwinds.
