Signs of hope in GDP data: Will RBI's 7.2% FY25 growth projection be met?

The National Statistical Office has released its quarterly estimates of gross domestic product (GDP). The period April-June 2024 saw GDP increase by 6.7 per cent in real terms year-on-year (Y-o-Y). This is being seen as deceleration, given that the previous quarter recorded 7.8 per cent Y-o-Y GDP growth and the equivalent for the same quarter of 2023-24 was as high as 8.2 per cent. It is also somewhat lower than estimates; the Reserve Bank of India (RBI), for example, had predicted growth would be around 7.1 per cent in the same period. Questions will naturally be asked whether the RBI’s annual growth prediction of 7.2 per cent will be met. However, it would be too soon to assume that the growth momentum has been entirely spent.

Analysing the numbers does indicate some reasons for optimism that these projections will be met. Gross value added increased sequentially. The two most impactful components of GDP that caused the comparative deceleration are government expenditure and agriculture. There are sector-specific issues for both of these. This was an election year, and it is possible that the model code of conduct constrained government expenditure for the weeks of the quarter during which the campaign was still being conducted. The share of government consumption in GDP fell to single digits in the quarter. Presumably, now that a government has been formed and a full-year Budget has been presented, government expenditure will return to normal. Net taxes also saw considerably lower growth in this quarter, at 4.1 per cent Y-o-Y, when measured in constant 2011-12 prices; equivalent growth in the same quarter of 2023-24 was 7.9 per cent.

Agriculture is, of course, dependent on the monsoon. The month of August saw some excess rain, but the meteorological department has predicted rain in September will be normal. A good monsoon should allow agricultural production to snap back. The fear is not deficiency but excess or delay in the withdrawal of the monsoon, which could threaten the harvest of the crop sown in the summer. The retreat of the monsoon is due to begin in northwest India on September 17; any delay will be closely watched. However, higher rain and reservoir levels will help boost rabi output.

Given that many concerns have been expressed about the possible exhaustion of domestic demand in India, the strength of private final consumption expenditure also seems a relevant point here. In constant terms, it increased its share of the pie in this quarter when compared to the same quarter in the previous year. While some of this might be an artefact of slower government consumption, the question is whether concern about a collapse in private demand will have to be deferred by a quarter at least. Some more recent high-frequency data, including results from consumer goods companies, argues in the opposite direction from this GDP print. The RBI’s own consumer confidence survey also produced results that would warrant some caution here. However, at a broader level, a continued growth momentum being seen will allow the central bank to focus on inflation and wait till it’s durably aligned to the target of 4 per cent.