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The services sector, led by Financial and RE services, anchored Q1FY24 growth (7.8%), while manufacturing growth disappointed despite reporting healthy operating profit amid the drop in commodity prices. The expenditure side depicted an uptick in private consumption growth and broadly steady investment growth (led by government capex, and some traction by the private sector), while net exports were more of a drag.

Going ahead, GDP growth will likely moderate in the quarters ahead. Falling income growth in the urban sector, shrinking corporate profitability, fading momentum in (front-loaded) government capex, demand-curbing monetary policies and diminishing global growth prospects may weigh on output. While we retain our FY24E GDP growth at sub 6%, we recognize economic activity recovery is not yet broadbased. However, factors like sustained buoyancy in services momentum and policy thrust to increase trend growth could counter those downward pressures.

Q1FY24 growth meets estimates, led by services

Q1FY24 GDP growth met estimates at 7.8% (Emkay: 7.7%, Consensus: 7.8%), led by services, while agri and manufacturing growth slowed. Nominal GDP growth of 8.0% implied a much lower deflator, due to WPI being negative (-0.7%) in Q1. On the production side, GVA growth of 7.8% means that growth for net taxes was largely flat YoY. Services showed healthy growth of 10.3%, led by Financial Services and Real Estate (12.2% YoY), with Trade, Hotels, Transport and Communication (THTC) growth being steady (9.2%) and Public Admin and Defense Services also growing well (7.9%). The contribution of financial and RE services to GDP growth more than doubled as a result (3.1% vs. 1.4%), as did public admin and defense (1.0% vs. 0.4%) while that of trade and hotels fell (1.8% vs. 1.6%). Industry growth weakened to 5.5% (6.3% prior), with subdued manufacturing growth (4.7%), despite lower commodity prices. The manufacturing slowdown was possibly due to the sharp contraction in exports during the quarter. Additionally, construction also decelerated (7.9% vs. 10.4% prior), at odds with our expectations, despite both Centre and state capex being higher in this period, while demand for steel and cement was also robust, and the real estate sector saw a boom. Electricity and utilities growth fell sharply (2.9% vs. 6.9% prior). Agriculture growth weakened to 3.5%, and there are further downside risks ahead due to the weak monsoon season.

Expenditure side shows private consumption leading the way

The expenditure side showed private consumption leading the way, at 6.0% growth (vs. 2.8% prior), which is also reflected in the healthy growth seen for services. The formal sector’s employment also saw robust growth in this period, which would have contributed to healthy private consumption. Government consumption was negative (-0.7%), with revenue expenditure for the Centre having been negative during Q1. GFCF growth stayed healthy at 8.0%, as both the Centre and states front-loaded their capex in Q1. Net exports growth turned negative, with exports contracting sharply during the quarter.

Challenging growth pressures, but FY24E growth at 5.7% may still have an upside

Even as domestic activity is maintaining resilience, economic activity recovery is not yet broadbased. While rural income has remained tepid, urban employment growth has been steadily growing at a low rate and urban incomes will also likely ease ahead. This, in conjunction with the lagged effect of tighter monetary policy, will further curb domestic demand. On the other hand, capex indicators are healthy with further improving capacity utilization and signs of rising new project announcements. The domestic economy will also face challenges going forward, with higher global uncertainty, tightening global financial conditions, lower corporate profitability ahead and still-elevated inflation. We are also keeping a watch on weather vagaries, which could pose risks to our agri output forecast. While we retain our FY24 GDP growth forecast at 5.7%, we recognize factors like sustained buoyancy in services momentum and policy thrust to increase trend growth, ahead of the general elections, could add upside risk to our forecast.

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