The National Statistical Office (NSO) recently announced that the GDP growth rate for the April-June quarter of the current fiscal year (FY) 2024 has reached an impressive 7.8%. This growth is commendable, especially in the context of global economic challenges. It also signifies a strong improvement compared to the preceding January-March quarter of FY 2023, which saw a growth rate of 6.1%. The growth can be attributed to a supportive base effect and the gradual recovery of the service sector, which had been slow to rebound after the impact of the Covid-19 pandemic. The Reserve Bank of India (RBI) had predicted an 8.1% growth rate for this quarter, while the rating agency ICRA anticipated a growth rate of 8.5% for the same period in FY 2024.
Factors Driving the Growth
Several factors have contributed to this notable acceleration in GDP growth. Firstly, the ongoing recovery of the service sector, coupled with rising demand in this segment, has played a crucial role. Secondly, there has been notable investment activity both from the government and the private sector, further fueling economic growth. Aditya Nayar, Chief Economist of ICRA, highlighted the impact of increased services demand and improved investment activity, particularly from government capital expenditure and reduced commodity prices that bolstered margins in various sectors (“Livemint,” 22 August 2023).
Challenges Looming in the Second Half of FY 2024
However, the latter half of FY 2024 presents several challenges for the Indian economy. Firstly, erratic rainfall has led to extensive areas of uncultivated land. Recent estimates indicate that paddy production may fall short by around 5% compared to the previous year. Deficient rainfall between June 1 and August 23 affected 267 districts across India. Urgent rain is required within the next 15 days to mitigate this deficiency, although such relief appears unlikely according to experts. The unpredictable rainfall also adversely impacted sugar production in the current fiscal year, a shortfall that may not be offset in the next fiscal due to the erratic rainy season. Additionally, water scarcity could affect rabi crops, further exacerbating the uncertainties faced by the agricultural sector.
Secondly, the momentum of government capital expenditure could potentially slow down as India approaches parliamentary elections, thereby limiting growth. ICRA projects a real GDP growth rate of 6% for the entire fiscal year, while the RBI estimates it at 6.5%.
Thirdly, the adverse effects of unseasonal heavy rain in the first quarter, along with the lagged impact of monetary tightening, are expected to impact growth in the subsequent periods, as indicated by an ICRA report.
Fourthly, weak external and reduced import demand will nega-tively affect economic growth. Exports from India experienced a decline of 16% year-on-year to $32.25 billion in July 2023, the lowest since October 2022. Imports also declined to $52.92 billion, impacting production and overall GDP.
Fifthly, ICRA has highlighted a surge in external commercial borrowings related to capital expenditure for modernization, new projects, local purchases, and capital goods imports. This increase to $13 billion in the April-June Q1 surpasses the full-year FY 2023 level of $9.6 billion. Consequently, sustaining the high GDP growth seen in Q1 may prove challenging in subsequent quarters of the current fiscal year.
Lastly, the escalating geopolitical tension between Russia and NATO-backed Ukraine poses a significant global challenge, including potential implications for India.