India Q2 GDP: Economists Raise Full-Year Forecasts But 'Just Looking Like A Wow' Data Has Its Oddities

India's better-than-expected GDP growth in July-September quarter prompted economists to raise their full-year forecast. However, economic growth is anticipated to slow down in the second half of the current fiscal.

The country's gross domestic product grew 7.6% in the July–September quarter, lower than 7.8% in April–June, according to the latest estimates released by the government's statistical office on Thursday. Forecasts for the full year now range between 6.2-7% versus 5.9-6.7% earlier.

Continuing Resilience in Q3

High-frequency indicators continue to point to resilience in economic activity, according to Kotak Securities. However, headwinds to growth loom large from continued weak rural demand, which can be exacerbated in the case of adverse rainfall impacting winter crops; muted overall consumption growth in the near term, which can be further impacted by the higher risk weights on key credit segments; the lagged impact of cumulative rate hikes and financial tightening; and moderation in global growth over the next few quarters, leading to some pressure on manufacturing and exports.

Factoring in the latest print as well as a better-than-expected global growth outturn, we raise our FY2024E real GDP growth to 6.8% from 6.2% earlier, with 2HFY24E growth at 6% from 5.7% earlier, Kotak said.

"We maintain our FY2025E real GDP growth at 6.3%, assuming some global slowdown in 1HFY25 followed by recovery in both global and domestic demand conditions," the note stated. Growth prospects in FY2025 will also be shaped by some easing in financial conditions, a normal monsoon/agriculture sector outlook, and the continuation of the government's capex, albeit at a much slower pace, it explained.

Oddities To Data

India's Q2 FY24 GDP growth data offered us a ‘Just looking like a wow' moment, according to QuantEco Research. "But, at a closer look, we find the data to be carrying some oddities," it said. The headline growth print was somewhat in contrast to the adverse macroeconomic backdrop of elevated inflation and the uneven distribution of the Southwest monsoon that stirred Q2 FY24, the note said.

Several high-frequency indicators—services PMI, housing sales, air passenger traffic, e-way bills—pointed towards resilience in services demand. However, core services GVA growth—services ex-public administration—slowed sharply to 5.3% in Q2 FY24 from 11.1% in Q1.

The jump in manufacturing growth to 13.9% year-on-year from 4.7% in Q1 is somewhat surprising, the note said. "While lower commodity prices may have supported value added in general, we believe a negative deflator—as well as the deployment of a single deflation methodology—may have exaggerated Q2 FY24 manufacturing growth upside."