India’s growth in the June quarter (6.7 per cent) fell to its lowest level in five quarters due to a lower increase in net indirect taxes during the three-month period.
Gross domestic product (GDP) growth was lower than the Reserve Bank of India (RBI) had predicted (7.1 percent) and lower than a Reuters poll of 52 economists had predicted (6.9 percent).
However, data released by the National Bureau of Statistics shows that gross value added (GVA) growth picked up sequentially in the June quarter by 6.8 per cent, compared with 6.3 per cent in the March quarter of FY24, due to lower “net taxes on products”, arrived at by subtracting subsidies from indirect taxes. GDP is obtained by adding net indirect taxes to GVA.
“Typically, real GDP growth outpaces GVA growth due to a positive contribution from indirect taxes net of subsidies. However, central government subsidies are showing a low growth rate of 3.6 per cent in the first quarter and a negative growth of (-) 10.9 per cent in the first four months of FY25. This implies that even going forward, GVA and GDP growth rates may remain close,” said DK Srivastava, Senior Policy Advisor, EY India.
Aditi Nayar, chief economist at ICRA, said the slowdown was not a cause for alarm as it was driven by normalisation of net indirect tax growth. The diverging trend between GDP and GVA, which averaged 160 basis points in the previous two quarters, had led to higher GDP growth and lower GVA growth.
During the June quarter, agricultural growth (2.7%) continued to be negatively impacted by poor monsoon conditions and heatwaves last year, which caused reservoirs in many states to dry up. However, this was offset by double-digit growth in labour-intensive construction (10.5%) and electricity, gas and water supply (10.4%).
Manufacturing decelerated sequentially to a four-quarter low of 7 percent, reflecting moderation in industrial production data and corporate profitability, while services rebounded sequentially to grow at 7.2 percent.
Private spending, proxied by private final consumption expenditure, accelerated to a six-quarter high of 7.45 percent, while government final consumption expenditure contracted marginally (-0.24 percent) during the quarter.
However, investment demand growth, as proxied by gross fixed capital formation (GFCF), picked up sequentially to 7.47 per cent despite a contraction in the Centre’s capital expenditure during the election quarter.
Dharmakirti Joshi, chief economist at CRISIL, said that while private consumption showed mixed trends in the first quarter, initial signs of a recovery in rural consumption were visible.
“We expect private consumption demand to improve this year, compared with an anemic 4 percent growth rate in fiscal 2024. Stronger agricultural growth will boost incomes and lower food inflation will improve discretionary spending,” he added.
After net exports showed a negative contribution to GDP in FY24, its contribution turned positive by 0.7 percentage points in the June quarter of FY25 due to strong growth in exports, including those of goods and services.
Rajani Sinha, chief economist at CareEdge Ratings, expects GDP growth in FY25 to be 7 per cent, below the RBI’s projection of 7.2 per cent.
“In the coming quarters, the agriculture sector is expected to witness better growth on the back of a good monsoon, despite challenges related to its distribution. An increase in government capital expenditure in the coming quarters and a pick-up in private capital expenditure will support growth. Also, recovery in the agriculture sector and lower inflation will boost consumption in the coming quarters,” he added.
First published: August 30, 2024 | 10:35 PM IS
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