Monetary Policy Committee may have underestimated economic growth for Q2

Most economists peg it higher than 6.5%, numbers to come today

Most economists and experts are in sync with Reserve Bank of India governor Shaktikanta Das' optimism that the second quarter economic growth would surprise everyone on the upside, at least in comparison to the monetary policy committee's (MPC) projection of 6.5 per cent. The national account numbers, including gross domestic product (GDP), for the quarter are slated to be released later today.

Barring QuantEco Research and partly Deloitte India, all other think tanks that Business Standard spoke to believed that the economy grew more than 6.5 per cent during the second quarter of the current financial year compared to 7.8 per cent in the first quarter.  

Deloitte India gave the range of 6.4-6.7 per cent.

Earlier, Das had said at a Business Standard event,"Looking at the momentum of economic activity, looking at a few early indicators, I can say that the second quarter GDP number ... in all probability will surprise everyone on the upside."

HSBC, which pegged the economic growth at 6.8 per cent for the second quarter of FY'24, attributed its projection to buoyant urban consumption demand, strong government capex and a robust services sector. However, it also noted that some of the exuberance is likely to be statistical, led by low base effect.

Base effect refers to the impact of the  growth numbers of the corresponding period of the previous financial year. The lower the number, the higher would be the figure for this year. The economy grew 6.2 per cent in the second quarter of FY'23.

Even if the economy grows by the highest number -- 7.1 per cent-- given by experts for the second quarter, it would be lower than 7.8 per cent of the first quarter due to normalising base effect.

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ICRA Chief Economist Aditi Nayar, who projected the GDP growth at 7 per cent for the quarter under review, said a normalising base and an erratic monsoon are expected to result in a sequential moderation in the GDP growth to seven per cent in Q2 FY24 from 7.8 per cent in Q1,FY'24.

"Regardless, we anticipate that the GDP expansion in this quarter will exceed the monetary policy committee's October 2023 projection of 6.5 per cent," she said.

Barclays India chief economist Rahul Bajoria too said the underlying growth trends continue to look robust in India, with activity underpinned by domestic consumption, high levels of state-led capex, and strong growth in the utilities sectors.

Pointing out that the second quarter is not an agri season as only residual production comes in, Bank of Baroda chief economist Madan Sabnavis said the second quarter got a lot of boost from the profit performance of India Inc which affects manufacturing and hotels.

He said high goods and services tax (GST) will get reflected in the trade segment of the GDP. Besides, good infra push already seen in government space would be reflected in the construction activity, he said.

"The government spending has been on target and hence will show in the public administration group," he said.

SBI Group chief economic advisor Soumya Kanti Ghosh also said the GDP growth in the second quarter was supported by the government infrastructure spending, improved private sector capex, robust and broad-based bottomline growth of corporates amidst declining input cost providing the necessary fillip to investment demand.

Also Read: India's GDP growth expected to slow to 6.3% in FY24: OECD economic outlook

"Provisioning costs of banks continue to remain low thereby improving their profitability," he said.

Ranen Banerjee, economic advisory services partner at PwC, said the high frequency indicators have been quite robust for Q2 with strong purchasing managers' index (PMI) prints and healthy GST collections.

While PMI for manufacturing stood at average 57.9 in the second quarter, the same as the first quarter of FY'24, that for services was up at elevated levels of 61.1 compared to 60.6 in the first quarter.

Banerjee said the production ramp up was also there with the expectation of festival demand and that will also support the GDP. The front-loading of capex by the government will also support a strong showing of GDP, he said.

RBL Bank economist: Achala Jethmalani said based her projection of 6.9 per cent GDP growth for Q2, FY'24 on improved investment demand and net export earnings compared to September quarter of last year.

She said the economy was largely driven by higher industry sector growth of 6.7 per cent in Q2 this year against a contraction of 0.5 per cent a year ago.

"This performance will be premised upon broad-based gains in mining, manufacturing and electricity production," she said.

The index of industrial production (IIP) rose 7.4 per cent in the second quarter of FY'24 against 4.8 per cent in the first one. Almost one-fourth of the industrial sector in GDP is based on IIP, while the rest comes from the corporate filings.

She said growth in the services sector is seen moderating but it would still be eight per cent, driven by higher credit growth and government spending.

Rumki Majumdar, economist at Deloitte India said a few high frequency numbers such as credit growth, flights taken, suggest that services sector remains buoyed as consumer spending picks up.

A build up to festive season bodes well for the economic activity, she said.

"We are also expecting the industry sector to do well as seen in the rebound in auto sales, IIP manufacturing numbers, and strong corporate profits in sectors such as capital goods, cement and electronics," Majumdar said.

GDP growth projections in % for Q2, FY'24

Deloitte	6.4-6.7
QuantEco Research	6.5
MPC	6.5
Bank of Baroda	6.7
Barclays	6.8
HSBC	6.8
RBL Bank	6.9
India Ratings	6.9
ICRA	7
PwC	7-7.1
SBI	7.1
Source: Respective institutions