GDP Growth

For 2nd quarter ended September 2023,  India reported real GDP growth of 7.6% which is much better than the street estimates of around 6.8%. India may finally find itself in a macro sweet spot.

 A big positive surprise

 GDP growth in India for Q2FY24 came in at 7.6% in real terms and that is at least 80 bps better than the street view, which was closer to 6.8%. Even the big optimists had not pegged GDP at over 7%. The 7.6% growth came as a big surprise as it was triggered by positive cues coming from manufacturing, mining, construction, and utilities. Agricultural output took a hit in Q2 as weak monsoons, erratic rainstorms and supply chain issues impacted growth.

 Real news was in nominal GDP

 In our obsession for real GDP growth, we often tend to overlook the nominal GDP projections, which is the core story is. For instance, nominal growth in Q2 at 9.1% was much higher than Q1, but the eventual real growth got impacted due to higher inflation in second quarter. An important factor also is that while farm growth showed a fall in real terms, it was again strong nominal growth, being hit by higher farm inflation. Finally, the big boost to growth came from 4 key components viz, manufacturing, mining, utilities, and construction. These were the big positive drivers of GDP in Q2 and growth at a sharply higher clip.

 What about external factors

 The sharply higher Q2 GDP growth was no only special for the surprise factors, but also because it comes amidst some very strong headwinds. Inflation figure was much higher in the second quarter due to a mix of factors. Global levels of hawkishness have not gone away, yet the impact on the India growth story was quite limited. Several external cues are still at play in the Indian context. For instance, global inflation is still being imported into India and the hawkish stance of global central banks is still a factor in what India does. Apart from the high oil prices, there are also factors like geopolitical risks that became an acute headwind for the Indian economy.

 What is the sweet spot then?

India appears to be enjoying a sweet spot in much the same way as the US economy is also enjoying a sweet spot. On the back of 20 months of rate hikes, the retail inflation has come down in a secular manner. However, good news is that this fall in inflation has not come at the cost of GDP growth. To an extent, one can say that the government giving a huge thrust to capex in the last 2 years has been the central factor, but that is fair game for the government to focus on. The fact is that despite rates in India being 250 bps higher, the GDP impact has been very limited. Goldilocks effect is that growth remains high, even as the inflation is largely controlled.