The Indian economy expanded by a staggering 7.6 per cent in the second quarter of the ongoing financial year. The economy has now grown at 7 per cent plus for two straight quarters. This raises a serious question over the accuracy of forecasts that have been continuously casting doubt on India’s macroeconomic resilience post the pandemic.
In a departure from the past, the manufacturing sector grew at a robust 13.9 per cent in the second quarter, compared to 4.7 per cent in the first quarter. Growth in the second quarter was at a nine-quarter high. The contribution of the sector also reached a nine-quarter high of 2.5 per cent.
This could be a sign of an uptick in manufacturing, triggered by a slew of policy initiatives, ranging from steady government capital expenditure, the PLI scheme (ensuring export competitiveness in specific sectors), the formalisation drive in both MSMEs (Udyam) and the labour force (e-shram), and the stabilisation in incremental credit deployment.
The corporate books remain healthy. The bottom line has grown impressively in the second quarter (at 31 per cent, it is in line with the first quarter growth of 30 per cent), outpacing the top-line growth. Growth was broad-based. Interestingly, the FMCG sector, a barometer of rural consumption, reported revenue growth of 5 per cent while EBIDTA (earnings before interest, depreciation, tax and amortisation) and PAT (profit after tax) grew by 16 per cent and 15 per cent respectively, signalling that rural demand and consumption may have also just turned the corner.
We have already witnessed a year of historic capex intentions with new investment announcements hitting a high of Rs 37 lakh crore in 2022-23, as compared to Rs 20 lakh crore in 2021-22 as per Projects Today, with increased participation from the private sector. Major industries where new announcements were made include roadways, iron and steel, basic chemicals, real estate, non-conventional energy, electronics, automobiles, hydel-based power, data centres and power distribution. In the first half of the year, the investment momentum has continued with announcements of around Rs 15 lakh crore, 8 per cent higher than last year.
Sectors such as auto components and ancillaries, gas distribution utilities, telecommunication services, hotels, restaurants and leisure, retailing, and NBFCs are reporting higher credit rating upgrades to downgrade (U/D) ratios in the current year, indicating that corporate balance sheets continue to show improvement across such sectors
Agriculture, which grew steadily during the pandemic, grew by 1.2 per cent in the second quarter and is likely to witness subdued growth due to several factors. A weak monsoon has led to lower-than-normal kharif crop output this year. It has also delayed the harvesting of kharif crops and, in turn, affected the rabi crop sowing, though, the deficit in acreage is reducing.
Within the farm sector, the share of “allied activities” (this includes dairy, fisheries, etc), which may serve as a counter-cyclical buffer in the agriculture ecosystem, has increased from 34.6 per cent in 2011-12 to 46.1 per cent in 2021-22. This is a good sign, and reduces dependence on farm income.
Amidst this transformation, banks have also started financing the entire agri value chain. Agri loans by banks have increased by 15.4 per cent in 2022-23, from around 10 per cent in the past two years. In 2023-24, they have, on average, increased by 17 per cent till October.
The services sector growth moderated to 5.8 per cent due to low growth in trade, hotels, transport and communication. This sector has the maximum weightage in services. However, on a sequential basis, this sector has expanded by 9 per cent, which is much higher than the average 1.3 per cent decline in the second quarter of every fiscal year till the pandemic. It seems that the second-quarter performance of this sector is always a drag given the seasonality of the Indian economy. When seen through that lens, the 9 per cent growth looks healthy.
On the expenditure side, private consumption decelerated to 3.1 per cent, perhaps reflecting the impact of higher inflation. However, again on a sequential basis, growth increased by 2 per cent, as against a 1 per cent decline in the second quarter of every fiscal till the pandemic.
With a robust festive season, we expect consumption expenditure to pick up pace in the third quarter. Separately, government consumption and investments also registered healthy growth. Investment as measured by gross fixed capital formation increased by 11 per cent, driven by strong capital expenditure by the Centre (49 per cent of budgeted target) and states (32 per cent of budgeted) in the first half of the current fiscal.
So, what does all this indicate for the economic momentum over the short to medium term?
While there does tend to be a downward bias to growth in most of the growth forecasts, we are now forecasting GDP growth for the full year at 7 per cent, up from our earlier assessment of 6.7 per cent. There is the possibility of being further surprised on the upside. We do believe that the third and fourth quarter growth won’t be below the trend given the strong momentum in the economy.
If there is one risk that we foresee it is the possibility of much softer global growth. Consumer sentiments have worsened, especially in the US and the Euro region, amidst growing uncertainty. Major economies have witnessed further tightening of financial conditions. Global trade continues to face significant headwinds. Export orders for manufacturing declined in October, after two months of improvement. However, amidst all this, the Indian growth story remains a beacon of hope.
The economy is unlikely to slow down in line with other major economies of the world as the government continues to undertake reforms.
The writer is Group Chief Economic Advisor, State Bank of India. Views are personal
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