Understanding Causes Of India's GDP Moderation In Fourth Quarter

India's gross domestic product (GDP) growth slowed to 7.8 per cent on-year in the fourth quarter (Q4) of last fiscal from 8.6 per cent the previous quarter but was higher than 6.1 per cent in the year-ago quarter. Growth for the third quarter was also revised up to 8.6 per cent from 8.4 per cent.

Crisil Ratings in a report said that the growth moderation was driven by the fixed investment segment on the demand side. Private consumption trailed overall GDP growth but improved its performance in the second half of the fiscal. According to the report, “Net exports also impacted GDP growth positively in Q4, driven by pick-up in export growth and moderation in import growth."

On the supply side, gross value added (GVA) growth moderated to 6.3 per cent in Q4 from 6.8 per cent in the previous quarter. It remained much lower than the GDP growth as net taxes grew 22.2 per cent on-year during the quarter after a 31.2 per cent growth previous quarter.

While GVA growth for agriculture picked up (0.6 per cent in Q4 vs 0.4 per cent previous quarter), it slowed for industry (8.4 per cent vs 10.5 per cent) and services (6.7 per cent vs 7.1 per cent). The subdued growth in agriculture and allied activities reflects lower crop output this year. According to the SAE, total food production will be 1.3 per cent lower on-year — kharif 1.0 per cent lower and rabi 1.7 per cent.

Within the industry, manufacturing growth moderated to 8.9 per cent in the quarter from 11.5 per cent in the previous quarter. Infrastructure and investment-related sectors, which had contributed to the strong growth in the first half of the fiscal, slowed in the second half, according to the granular data from the Index of Industrial Production (IIP). 

The benefit from falling input costs is also fading, as the decline in commodity prices halted, Crisil Ratings mentioned in the report. Construction GVA growth, though a moderation, was a healthy 8.7 per cent (vs 9.6 per cent). “Moderating government capital expenditure (capex) towards the end of the fiscal may have weighed on the construction growth, ”it added.

However, a slowdown was seen in electricity (7.7 per cent vs 9.0 per cent) and mining (4.3 per cent vs 7.5 per cent). Services growth moderated (6.7 per cent vs 7.1 per cent in the previous quarter), primarily driven by contact-based services, namely trade, hotels, transport and communication services.

Softening Investments

Investments — the key driver of domestic demand this fiscal — moderated in Q4 for the second consecutive quarter. Private consumption remained steady, after rising in the previous quarter. Fixed investment slowed as measured by gross fixed capital formation (GFCF; 6.5 per cent vs 9.7 per cent).

According to the report, “Slower government infrastructure spending may have dragged investment growth, with both central and state capex data showing an on-year slowdown in the fourth quarter.” Private final consumption expenditure (PFCE) stayed steady in the fourth quarter at 4.0 per cent on-year (previous quarter print revised up to 4 per cent from 3.5 per cent). However, the growth remained much lower than the 7.8 per cent GDP growth in the fourth quarter.

There seem to have been some signs of a rural recovery during the quarter. Demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) contracted significantly year, indicating easing job distress. Rural wages also showed signs of a pickup. However, demand for rural dependent sectors showed a mixed trend. For instance, two-wheeler sales rose in the fourth quarter but tractor sales continued to decline, it stated.

Urban demand seemed to have sustained some momentum. Employment prospects were broadly healthy with higher labour force participation and lower unemployment on year. Consumer durables production further grew in the fourth quarter and retail credit growth showed steady momentum. However, growth in consumer non-durables production slowed further, indicating a persisting uneven trend in consumption.

Outlook

After a strong GDP print in the past three years, we expect some moderation to 6.8 per cent this fiscal. “The growth will still be higher than the pre-pandemic decadal average of 6.7 per cent, continuing to position India as the fastest-growing major economy,” it stated.

Investments, a key factor that boosts growth, are expected to moderate as the government focuses on fiscal consolidation. The extent of revival in the private investment cycle will determine the investment momentum this fiscal. The other strong segment, urban demand, could moderate as credit conditions tighten this year. 

Transmission of past rate hikes to broader lending rates remains incomplete. 

As the wait for rate cuts from the Reserve Bank of India (RBI) prolongs, the transmission is expected to continue, raising the borrowing costs. In addition, the RBI’s regulatory measures to clamp down on risky lending will weigh on credit support to consumption.

That said, the forecast of an above-normal monsoon brings hope for the rural economy, which was a laggard in the country’s growth story last year. The consequent possible easing in food inflation could also boost purchasing power and support consumption. However, the distribution of monsoons will be the determining factor. Freak weather events, such as heatwaves and unseasonal rains, remain a risk, the report revealed.

“We expect a normalisation of the net indirect tax impact on GDP, after strong growth in the last fiscal,” stated Crisil Ratings.

Slower global growth can restrict the upside to goods exports owing to the normalisation of supply chains and an expected pick-up in the volume of trade in calendar 2024. Meanwhile, S&P Global expects global GDP growth to slow to 3.2 per cent in 2024 from 3.4 per cent the previous year, weighed by interest rates staying elevated for longer. Any spike in the prices of commodities— particularly crude oil — remains a risk for the country’s growth.