00:00 Hello and welcome to BQ Prime. India's GDP figures for the April-June quarter of the
00:07 ongoing financial year are set to be published on Thursday, that's August 31. Domestic economic
00:15 activity remains resilient. ICRA forecasts GDP growth at 8.5% for that quarter. That's
00:23 going to be the highest in four quarters. Now, to share her insights on what's upcoming,
00:29 we have with us Aditi Nair, Chief Economist at ICRA. Aditi, thank you so much for taking
00:35 time out for us today. Thank you, Pallavi.
00:39 So, to begin with, what are your expectations? What do you think will be industries that
00:45 will drive growth in Q1? Sure. So, we are pegging GDP growth in Q1 of
00:52 FY24 at 8.5%. So, it is a sequential improvement over the figure that we saw in Q4 of FY23.
01:03 And broadly, if we look at the underlying factors, there are two or three major drivers
01:07 of this high growth that we are expecting for this quarter. One is that there is a continued
01:13 recovery momentum that is there in the services sector, which was the worst hit during the
01:17 pandemic. And last year in Q1 is really when we saw the back to office, back to school
01:23 and back to sort of a normalcy coming out of an extended period of lockdowns across
01:29 the country. And so, the service sector was still in a recovery phase at that point. And
01:35 therefore, we believe that we are going to end up seeing a pretty high growth in some
01:39 of the components of the services sector, even in Q1 of FY24, because that whole process
01:45 of coming back to a pre-COVID sort of normal is something that has continued in this quarter.
01:52 The other very major factor that we see is corporate margins. So, last year after the
01:58 Ukraine-Russia conflict had started, commodity prices had reached a peak in June-July of
02:04 2022. And as compared to that, prices are now significantly lower on a YOY basis in
02:11 Q1 of FY24. And therefore, we are seeing that in several sectors there is a lot of easing
02:18 of margin pressure which is there. And this is something that we think also would have
02:22 boosted up the GVA growth, the gross value added growth, particularly of the industrial
02:27 sector. So, that's another factor that we are placing in terms of our projection of
02:35 8.5%, which is higher than what the Monetary Policy Committee had put its baseline projection
02:41 at, which is 8% for Q1 of FY24.
02:44 Alright. So, like you mentioned, services and corporate profits are likely to lead GDP
02:52 growth in Q1. I also want to ask you a little bit more about the agri space. So, as per
02:58 your expectations, agri GVA is expected to come in a little bit lower in Q1 than what
03:04 we had seen in Q4. Over and above, in August, post Q1 also, we have seen deficiency in rainfalls
03:13 in most parts of the country. So, what's the outlook for Q1 and for the rest of the year
03:19 in agri?
03:20 So, for Q1, we are expecting GDP growth, the GVA growth in agriculture at about 4%. This
03:28 is based on the latest available advance estimates for the Ravi crop, which was harvested in
03:34 Q1. So, while 4% is high, yes, it's still a step down from what we saw in the previous
03:41 quarter. And this was a quarter in which we had a lot of uneven rainfall as well. We have
03:49 from then on moved into the monsoon, which had a slightly delayed onset, delayed progress
03:54 across the country. Then we had very high rainfall in July, which sort of caught up
03:58 to a normal level by the end of that month. And then again, we've had a lot of deficiency,
04:05 as you said, in rainfall in the month of August. And at this point in time, we are about 7%
04:11 below normal for the monsoon season as a whole. And to get to 100% of the long period average,
04:19 the rainfall would need to be about 20% to 22% higher than normal in the remainder of
04:25 the monsoon season, which seems a little unlikely. And even if we have an absolutely at par rainfall
04:32 in the rest of the monsoon season, we're basically going to end up at about 94% of LPA for the
04:38 full four-month period, which is just at that lower bound of what is considered to be normal.
04:44 So most likely, I would imagine that we're going to be in somewhere in the 90% to 100%
04:51 kind of range for rainfall. I mean, 100% I would think is quite unlikely now. Maybe let's
04:56 say 90% to 95% kind of range for rainfall for the entire monsoon season. And reservoir
05:04 levels are trending well below where they were last year at this time, although as compared
05:09 to the historical level, they're not so bad. They're quite OK. Now, really, at this point,
05:14 a lot of sowing is behind us. The main thing now is what is going to be the impact of how
05:20 the subpar rainfall on yields. And so this is clearly something which remains a concern
05:25 going ahead. And we are not terribly hopeful at this point that we're going to end up with
05:31 a very high GVA growth in FY24 for agriculture, unless we end up with significant post-monsoon
05:41 rainfall. So as of now, I would imagine that the GVA growth for the full year is probably
05:47 going to be 1.5% to 2.5%. And even this will benefit from this 4% growth that we are estimating
05:54 for Q1.
05:55 Sure. All right. State capex was fairly strong in Q1, also a sharp uptick from Q1 last year.
06:04 So what's the expectation on that aspect, government, central and state capex? Do you
06:11 also see that as one of the primary drivers of growth in Q1 or the first half of the fiscal
06:17 year?
06:18 Absolutely. In fact, we've seen a lot of investment-related indicators that have done quite well in Q1.
06:26 And we are hopeful that we're going to end up with a double-digit expansion in the cross-fixed
06:31 capital formation in this quarter. So this, again, is something that I do think is going
06:36 to be a big driver of growth in Q1 of FY24. And a couple of interesting things, of course,
06:42 Government of India does seem to be front-loading their capex. And for the state governments
06:46 as well, this year, at least the approvals as far as the capex loan schema concerned
06:53 have kicked off a lot sooner. That is something that should nudge capex, faster capex from
07:01 the state governments. Secondly, we've seen that the central tax devaluation to the state
07:06 governments, there was a double tranche in June. And after that, even the July figure
07:11 was higher than what we had seen in April-May.
07:14 So there has been a good amount of front-loading as far as the tax devolution is concerned
07:19 as well, which gives a lot of comfort as far as the revenue streams of state governments
07:24 are concerned. And such factors should help to front-load capex. Maybe even in the current
07:31 quarter, we should expect such trends to continue, which will push up the GDP growth in the first
07:36 half of FY24. However, we are a little cautious about what that would mean for spending in
07:44 the later part of the year as we move closer to the parliamentary elections. So typically,
07:48 when the model code of conduct gets put in place, we do see capex activity slowing down.
07:55 So by front-loading capex, what we're possibly trying to ensure is that the budgetary targets
08:00 are not missed. But at the same time, it may mean that what we're seeing as higher momentum
08:06 of spending in H1 may automatically kind of lead us into a slower momentum in H2 as we
08:15 get closer to the elections, but at the same time, making sure that the budgetary targets
08:21 are not missed by a wide margin for the states or not missed at all for the center. So that
08:28 is something to just keep in mind in terms of not necessarily extrapolating a very high
08:32 GDP growth in Q1 toward the rest of the year.
08:37 All right. So, you know, at various parts last fiscal, there were some concerns around
08:44 demand, specifically rural demand. What's the outlook for this year, specifically in
08:49 Q1? There seems to be a consensus that rural demand has seen some sort of a pickup. What's
08:56 your expectation?
08:59 I would say that rural demand is still kind of mixed and I would expect it to remain cautious
09:06 going ahead, given how erratic the monsoon has been so far. So I do think that overall,
09:12 we are in for a period of very uneven demand as we have been in the last year or so. So
09:19 my expectation is that urban India will possibly continue to show a stronger demand than rural
09:25 India, even though the pace of growth, given the base effect, may be different. And also
09:32 within that, we expect a continuation of the uneven sectoral demand. So by that, what I
09:39 mean is we've seen for the last several quarters, our demand for services has been much stronger
09:44 than that for goods. And that is, again, possibly something that will continue over the major
09:49 term.
09:50 All right. So like you've mentioned earlier in our conversation, H1, the first half of
09:56 the current fiscal, is likely to see higher growth. For the full year, ICRA's estimate
10:02 is a tad bit lower than what the Monetary Policy Committee's was at its last resolution.
10:08 We did discuss some of the concern points, namely agricultural GVA and lower government
10:15 capex in the second half. What else is likely to weigh on growth in the second half?
10:21 A couple of more things. The lagged impact of monetary tightening as it plays out through
10:27 the system and also external demand that will possibly remain weak. So broadly, these would
10:32 be the points that we expect would keep demand a little bit lower. Or rather, I would say
10:39 that these are the factors based on which we think that GDP growth for the full year
10:43 is going to be lower than what the MTC has estimated, and especially because of H2. So
10:50 for H1, particularly for Q1, our estimate of GDP growth is higher than the MTC's. Q2
10:56 is broadly 9, but Q3 and Q4, we do feel that growth could slip below the levels that the
11:03 MTC has projected.
11:05 All right. That's it from my end. Thank you so much for taking time out. We'll keep in
11:11 touch. GDP figures are set to be published on Thursday. Stay tuned to BQ Prime.
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