On August 31, 2023, the MOSPI put out the India GDP numbers for Q1FY24. At 7.8%, the real GDP growth was much better than expected. Here is a look at key takeaways from the Q1 GDP story. 

Manufacturing under stress 

For the quarter to June 2023, the GDP growth stood at 7.8% in real terms and 8.0% in nominal terms. Real GDP is the nominal GDP adjusted for inflation. Also, the gross value added (GVA) grew at 7.8% in the June quarter. GVA is the GDP shorn of the impact of indirect tax and subsidy effects and is considered to be a more reliable barometer. However, the manufacturing GDP growth was low compared to the year-ago quarter, due to the pressure exerted by weak rural demand and tepid export demand.

Services sector shines in Q1

To begin, the agricultural sector growth at 3.5% was impressive, despite weak Kharif acreage. But the real boost to the GDP growth came from the services sector. Even within the services space, the big boost to GDP came from contact intensive services like trade, hotels, transport, and construction. Financial services also saw a robust growth and overall, it was the services sector that actually compensated for the weakness in manufacturing. The impact magnified as services sector already accounts for over 65% of the GDP. This was like a comeback after 3 years of a tepid show.

But, what about nominal GDP

While real GDP is what we use as the barometer of growth, it is nominal GDP (gross of inflation adjustment) that we use for measuring the output impact as well as the jobs impact. The nominal GDP growth used to be in double digits over the last few quarters, but in the first quarter of FY24, it has fallen to 8% which means the quantum of growth has slowed and the gains on real GDP largely emanate from lower inflation. The concern is that, with the inflation stabilizing, the incremental gains from falling inflation would be limited and that could impact real GDP growth in the coming quarters. We will have to wait and watch, how this plays out.

How will RBI interpret GDP?

The RBI is currently in a dilemma on whether to focus on prices or growth in its rates decision. Inflation in July had spiked to 7.44% but the rates are on a pause since February. The current GDP shows that all is well on the growth front. It will boil down to how the RBI interprets the data. It can say that the time is ripe for a rate cut to curb price rise. Alternatively, RBI can say that with the growth engine revving, there was no need to upset the applecart. The RBI can even interpret the GDP data and express concerns over nominal GDP. How the RBI interprets this data will have long term repercussions for India inflation and also for GDP growth!

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