In the inaugural quarter of the fiscal year 2024, India showcased impressive economic growth, with a GDP expansion rate of 7.8%. A significant leap from the preceding quarter’s 6.1%, this growth was primarily driven by augmented private consumption and government investment. However, experts warn that sustaining this zenith might prove to be a formidable challenge.
The underlying reasons for this remarkable growth are multifaceted. The government kickstarted the fiscal year with a substantial capital expenditure (capex), synergized with a resurgence in private investments. Consequently, the investment’s share in the GDP continues to hover around an almost decade-high of approximately 35%. Concurrently, private consumption surged by an impressive 6%. This upswing can be attributed to the substantial drop in retail inflation during the initial quarter, which bolstered the purchasing prowess of consumers. Nevertheless, the sustainability of this trend is precarious, given the persistently high inflation levels in recent months. Furthermore, the buoyancy in the economy benefited from robust bank credit growth, which managed to thrive despite elevated interest rates. The services sector spearheaded the surge in growth, with the financial, real estate, and professional services subsectors exhibiting the most substantial gains.
Nevertheless, there are formidable headwinds confronting this growth trajectory, most notably the external sector, which exhibits signs of lagging. This deceleration is adversely affecting India’s exports. The United States, grappling with a downgrade in its sovereign debt rating by Fitch, faces a towering national debt of $33 trillion, necessitating fiscal restraint. Simultaneously, the $18 trillion Chinese economy is grappling with a pronounced slowdown. The International Monetary Fund (IMF) estimates that a 1% dip in China’s growth results in a 0.3 percentage point decline in growth for other countries. China, as India’s second-largest trading partner, accounting for 11.2% of its goods trade, is poised to inflict harm on Indian exports as its economic pace wanes.
Small Indian enterprises, constituting nearly 40% of exports, confront adversity from the impending economic downturn in advanced nations, primarily the United States and the Eurozone. An analysis by Crisil suggests that one in five Micro, Small, and Medium Enterprises (MSMEs) will experience stretched working capital. Remarkably, the U.S. and European Union markets collectively constitute one-third of India’s overall exports.
D.K. Joshi, Chief Economist at Crisil, emphasizes that China’s influence on India is modest, with only 5% of Indian exports directed there, while Europe and the U.S. account for 34%. “Our exports to Asia have also been slowing, which is of concern. From a merchandise trade perspective, there are clear headwinds, and these are visible in the data too,” Joshi points out. Exports have contracted for five consecutive months, with June registering a steep 22% decline compared to the previous year. A slackening global economy will inevitably impact exports and sectors reliant on them, warns Joshi. Inflation, particularly influenced by climatic conditions, is another variable that necessitates vigilant monitoring. Joshi cautions, “We need to closely monitor food inflation. The other is core inflation.”
Madan Sabnavis, Chief Economist at the Bank of Baroda, concurs that inflation may disrupt the continuity of growth momentum. Expectations were for inflation to moderate to the 4% threshold, but this year’s trajectory suggests otherwise. What commenced as inflation in cereals has since infiltrated pulses, vegetables, and now fruits and spices. The ultimate course – whether inflation stabilizes or surges – will hinge on the outcomes of the kharif harvest, he posits.
Sabnavis underscores that the principal impediments to sustained growth are the twin pillars of consumption and investment. “Scrutinizing the presentations of consumer goods companies, it is evident that they still anticipate rural demand’s revival during the third quarter – the harvest and festival season. While optimism prevailed during the fourth-quarter results, companies are less sanguine about rural demand, as their products primarily cater to urban areas,” he elucidates. The pent-up demand observed in India last year has seemingly subsided, particularly for manufactured goods. Sabnavis asserts that addressing consumption requires concerted efforts beyond government intervention. The journey toward celebrating India’s robust growth in the first quarter is an arduous one, contingent on navigating the challenging terrain that lies ahead.