Q1FY24 GDP suprises on the upside
When MOSPI announced the GDP growth for the first quarter ended June 2023, there were already expectations of GDP growth of around 7% plus. However, the actual real GDP growth (adjusted for inflation) came in at an impressive 7.8% for Q1FY24. We will come back to the nuances of the GDP mix later, but what this clearly stamps is that India will be the fastest growing large economy in FY24 by a margin.
When we talk of a large economy, we are talking of economies with GDP of $1 trillion and more only. In India, the MOSPI announces GDP figures, 2 months after the completion of the quarter. The June quarter GDP was announced on the last day of August and that is how the cycle goes on. Unlike the US, India does not provide advance estimates, second estimate and third estimate for each quarter. Let us take a quick look at what triggered the GDP boost in Q1FY24.
Table of Content
GDP growth led by services; as manufacturing tapers
The manufacturing sector had a tough time in Q1FY24 as the manufacturing GDP growth fell from 6.1% to 4.7% on yoy basis. Two key reasons for the slowdown in manufacturing was weak rural demand and a sharp fall in global demand for goods and services. The global hawkishness of central banks has forced the companies abroad to go slow on their purchase and investment decisions and that is impacting the demand for Indian goods globally. On the agriculture front, the growth improved 110 bps to 3.5% for Q1FY24.
This is appreciable as it comes on the back of a relatively weaker Kharif output last year and also the Kharif output impacted this year due to a combination of late rains and deluges. But all these concerns were offset by the incredible growth in the services sector. Not surprisingly, the services sector alpha came largely from the contact intensive sectors like trade, hotels, transport, construction etc. Financial services also provide a big boost in Q1FY24.
Key drivers of real GDP growth in Q1FY24
In recent times, the MOSPI has been reporting economic growth; both in terms of GDP and GVA. The idea of GVA is that it is GDP growth without the adjustment for taxes and subsidies and is more unbiased. The table below captures the Q1FY24 real GDP growth compared to Q1FY23. It also presents real GDP in absolute numbers.
| Sectoral Classification of Real GDP | Q1FY23 (YOY growth) | Q1FY24 (YOY growth) |
| 1. Agriculture, Forestry & Fishing | 2.4% | 3.5% |
| 2. Mining & Quarrying | 9.5% | 5.8% |
| 3. Manufacturing | 6.1% | 4.7% |
| 4. Electricity, Gas, Water Supply | 14.9% | 2.9% |
| 5. Construction | 16.0% | 7.9% |
| 6. Trade, Hotels, Transport | 25.7% | 9.2% |
| 7. Financial, Real Estate & Services | 8.5% | 12.2% |
| 8. Public Administration, Defence | 21.3% | 7.9% |
| GVA at Basic Prices | 11.9% | 7.8% |
| Impact of taxes | 32.3% | 7.7% |
| Real GDP Growth | 13.1% | 7.8% |
Data Source: MOSPI
Here is what we can infer from the data above. Real GDP has grown at 7.8% in Q1FY24, on the base of 13.1% growth in Q1FY23, which makes it more appreciable. Even as agriculture showed better growth and manufacturing faltered, as discussed previously, the real boost came from services. The quarter saw sharp double-digit growth in contact intensive sectors like trade, hotels, transport, real estate, and construction; even as financial services contributed a big chunk to the GDP growth in Q1FY24.
Did Q1FY24 real GDP gain from lower inflation
We all know that real GDP is nominal GDP, adjusted for inflation. In the last few quarters, the boost to real GDP was coming from falling inflation. However, with inflation stabilizing, that benefit appears to have peaked out. That explains why the real GDP growth in Q1FY24 is at 7.8% and the nominal GDP growth at 8.0% is almost in sync. One objection to the numbers is that the nominal GDP growth has come down and it is nominal GDP that determines output and jobs creation.
However, that is a different argument altogether. But, the one thing that these numbers do prove is that the RBI has been right in its inflation targeting. It was like a defence mechanism to protect the real GDP growth when the nominal growth starts to taper. Today, the nominal growth in GDP is tapering due to weak rural demand, tepid global demand as well as the waning base effect. At this juncture, lower inflation is ensuring that real GDP growth is robust even as nominal GDP growth is tapering.
Expenditure components in GDP growth
What were the heads of spending that contributed the most to the GDP growth in the first quarter of FY24?
| Nominal GDP – Spending Components | Q1FY23 (Share) | Q1FY24 (Share) |
| 1. Private Final Consumption Expenditure | 59.2% | 59.7% |
| 2. Government Final Consumption Expenditure | 11.1% | 10.5% |
| 3. Gross Fixed Capital Formation (GFCF) | 29.1% | 29.3% |
| 4. Changes in Stocks (CIS) | 0.7% | 0.7% |
| 5. Valuables | 0.8% | 0.6% |
| 6. Exports | 23.3% | 21.4% |
| 7. Imports | 27.0% | 23.8% |
| 8. Discrepancies | 3.0% | 1.6% |
| Nominal GDP | 100.0% | 100.0% |
Data Source: MOSPI (absolute figures in ₹ crore)
What do we read from the above table? The broad theme of the table is that trade (which played a major role in the GDP movement after the pandemic) has played a subdued role in FY24. The impact of private final consumption and government driven spending in the first quarter of FY24 and FY23 have been almost at par. The good news is that the share of gross capital formation remains close to 30%, which is indicative of a revival in the capital investment cycle in India. That is the good news.
Will Q1 GDP change the RBI outlook on rates?
With consumer inflation hitting 7.44% in July, there are expectations that the RBI may be closer to a rate hike after 6 months of pause. After all, on the growth front, this almost ruled out any hard landing even if interest rates are hiked by the RBI. But the real story 8is that the RBI efforts to aggressively curb inflation have paid off since the impact of inflation on real GDP has been neutralized. The robust GDP growth should, possibly, give the RBI the confidence to go ahead with rate hikes either in the October policy, or even earlier. After all, the RBI has to also manage inflation expectations.
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