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India’s GDP grew 7.6% in Q3, beating market expectations by a wide margin. Manufacturing contributed the most while agriculture and services dragged the economy. Erratic weather conditions hindered Agri sector’s performance while the robust read through of Services PMI did not indicate moderation in services activity. Increased imports are not translating into private consumption however it may be catering to the domestic capex activity. Analysis of last four general elections indicates that, GDP growth tapers in the year prior to general elections while it’s the other way round in the year following the general election. Strength in GDP print indicates that the impact of rate hikes is yet to fully reflect in the economy. We expect RBI to maintain its hawkish tone but rate action is unwarranted at this stage.

? Manufacturing leads the show; Private consumption weakens: Economic growth of 7.6% exceeded market expectations (7%) by a wide margin in Q2 of FY24, the role of adverse base was not significant in this growth. This robust economic performance was led by manufacturing and construction activity, while services and agriculture proved to be a drag (Ex 1). Moderation in agriculture activity was on expected lines due to erratic weather conditions while weakness in services was not anticipated as Services PMI continues to be in expansion zone (16). Growth in investments has been robust at 11% YoY vs 8% YoY in Q1, aiding GDP growth while consumption weakened to 4.3% YoY vs 4.9% in Q1. Within consumption, government consumption was strong (12.4% YoY vs - 0.7% YoY in Q1) but the growth in private consumption halved to 3.1% YoY. Adverse trade activity due to sharp rise in imports dragged the GDP print in Q2. It is pertinent to note that elevated imports did not translate into increased private consumption, but the strength in GFCF and government consumption indicates that imports are catering to Capex related activities.

? Economic performance during general election: We analysed last four general elections and its impact on domestic economic growth, in the "year prior" and "year of election”. Our analysis reveals that quarterly GDP growth tends to taper in the year before election, with weakest performance in Q4. On an average, economy grew 6.7% in Q1 of last four elections which tapered to 5% handle in Q4, in the year before general elections. Similar trend is evident in private consumption (PFCE) and Investments (GFCF) in the economy (Ex 6, 8, 10). While economic performance tends to be back-ended in the “year of election”, this is true for GFCF as well but we observed that private consumption is the weakest in Q3 of the election year. (Ex 7, 9, 11).

? Comfortable Fiscal situation: India’s fiscal situation continued to remain resilient on FYTD basis (Apr-Oct’23). Fiscal deficit of INR 8.04tn constitutes 45% of the Budgeted Estimates (BE) for FY24, which is sharply lower than the pre-Covid period average (~103%). Although gross tax revenue has been robust at INR 18.3tn, constituting 54.6% of FY24BE we see less room for an upside surprise. On the expenditure front, the quality of central government’s expenditure improved during Apr-Oct’23 period, as share of Capex in total expenditure doubled to 20% vs pre-Covid average of 9%.

? Robust GDP print indicates that transmission of rate hikes is incomplete: With every passing quarter it is becoming clearer that the impact of restrictive monetary conditions through transmission of cumulative rate hikes (till now) is yet to fully reflect in the economy. This also justifies the hawkish tone of central banks and negates the calls for rate cuts by certain section of the market. Latest GDP print in US (Jul-Sep) exceeded expectations; however private consumption was the main driver unlike in India. With Q2 FY24 GDP print, we expect RBI to maintain a hawkish tone and RBI may tinker its growth projections higher by ~20bps, but we do not expect any rate action on 8th Dec. We raise our growth forecast for FY24 by 20bps to 6.5%.

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