India's gross domestic product (GDP) growth will moderate to 7% on a year-on-year basis in Q2 FY2024 from 7.8% growth in Q1 FY2024, ratings agency ICRA has projected. The GVA growth is estimated to ease to 6.8% in Q2 from 7.8% in the first quarter of the fiscal year, driven by the services sector (8.2% growth expected from 10.3% in the previous quarter) and agriculture (to +1.0% from +3.5%), amid an improvement in the industry (to +6.6% from +5.5%).

The current ICRA projections are above the RBI’s 6.5% GDP growth estimated for the second quarter of the fiscal year, while its full-year estimate stands at 6.5% GDP growth.

“A normalising base and an erratic monsoon are expected to result in a sequential moderation in the GDP growth to 7.0% in Q2 FY2024 from 7.8% in Q1 FY2024. Regardless, we anticipate that the GDP expansion in this quarter will exceed the Monetary Policy Committee’s (MPC’s) October 2023 projection of 6.5%,” says Aditi Nayar, chief economist, head-research & outreach, ICRA.

Looking ahead, Nayar says, uneven rainfall, narrowing differentials with year-ago commodity prices, the possible slowdown in momentum of government capex amid the Parliamentary elections, weak external demand and the cumulative impact of monetary tightening are likely to translate into lower GDP growth in H2 FY2024.

"We maintain our FY2024 GDP growth estimate at 6.0%, lower than the MPC’s projection of 6.5% for the fiscal,” says Nayar.

In terms of investment activity, the ratings agency says the YoY growth performance of seven of the 11 investment-related indicators improved in Q2 against Q1. "While the YoY growth in the remaining four indicators weakened in Q2 FY2024 relative to Q1, all of them witnessed a double-digit expansion in the quarter, including the CV registrations (+13.5%), cement production (+10.2%), the states’ capital outlay and net lending (+33.5%), and the Government of India’s (GoI’s) capex (+26.4%)."

The aggregate capital outlay and net lending of 25 states, for which the CAG data is available, rose to ₹1.7 lakh crore in Q2 FY2024 from ₹1.2 lakh crore in Q1 FY202, although the pace of YoY expansion halved to 33.5% from 75.0%, respectively. The Centre's gross capital expenditure rose 26.4% to ₹2.1 lakh crore in Q2, it trailed the ₹2.8 lakh crore seen in Q1 due to monsoon.

ICRA estimates the industrial GVA growth to have risen to 6.6% in Q2 FY24 from 5.5% in Q1 FY2024, boosted by manufacturing, electricity, and mining. In construction, the ratings agency says the momentum remained healthy in Q2 FY2024, with the sub-par rainfall resulting in relatively lower disruptions. In services, ICRA estimates the services GVA growth to moderate to 8.2% YoY in Q2 FY24 from 10.3% in Q1 FY2024 due to the decline in output across all kharif crops.

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