Suvodeep Rakshit, Chief Economist at Kotak Institutional Equities, and Upasana Chachra, Chief India Economist at Morgan Stanley, expect gross value added (GVA) to be slightly higher at 6.2-6.5%.
Key drivers of this growth include improvements in agriculture, manufacturing, and increased government spending. However, the recovery in manufacturing and capital expenditure has been slower than expected, while urban consumption and credit growth remain weak.
A higher subsidy payout compared to indirect tax growth could widen the gap between GDP and GVA, keeping GDP growth at the lower end of expectations.
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These are the edited excerpts of the interview.
Q: Only 6% is your number. What are you seeing as the key weaknesses?
Chachra: We are tracking GDP growth at 6% for the December quarter, but the gross value added (GVA), which is the growth through the industry Agri services segment, will be higher at 6.2%. So there is a rebound from the July-September quarter levels, and there will be the support that we see growth gets from agriculture, some improvement in manufacturing and a pick up in government spending, while consumption, we expect will be more or less sort of steady versus the previous quarter.
In terms of drags, I don’t think I will call it a drag on growth. It is just that growth recovery has been a tad weaker than what we were also probably anticipating while we were in the October-December 2024 quarter. The recovery in the manufacturing segment and also the pickup in government capex spending especially has been a little back-ended, and that is why the growth numbers for the October-December 2024 quarter or our estimates are a little lower than where consensus is making it at.
Q: The government came in and spent with a bang in December. It overturned the capex fall as well, construction picked up a lot. Mumbai seems to give you that impression. So, if agriculture, construction, and government are good enough, it still doesn’t pull it up to 6.3% or something closer to the Reserve Bank of India (RBI) number?
Rakshit: We have a number of around 6.4-6.5% on the GVA and a much lower number on GDP. On the GVA front, you have the manufacturing sector, which has been boosted by a decent pickup. And I am comparing it with the July-September 2024 quarter number, a decent pickup in the corporate profit, especially from the larger contributors, such as petroleum products, automobiles, metals, chemicals, etc. Now that is a pickup in the profit growth, which will kind of reflect on the manufacturing side when we look at it from the GVA.
Agri sector growth should be stronger, given that the first advance estimate for the Kharif production has been on the stronger side. The construction sector, as you pointed out, if you look at the steel consumption or the cement production trends has a decent pickup. Also, the pickup in government spending, as you pointed out, will play a factor.
Now, services will be a bit of a mixed bag in my view. The financial sector growth has been hampered to some extent by the slowing credit growth. Urban consumption has been muted, as has been pointed out by a number of the companies, and which is also visible in the goods and services tax (GST) growth in that quarter slowing down towards a single digit number, and that would weigh on the wholesale and retail trade to a great extent.
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So GVA growth is possible around that 6.5% handle. And also we have to assume that the bases are not changing, because, if you recall, the bases were changed by 30-40 basis points (bps) and we had all the revisions, which were moving higher. Now the bigger question is on the GDP estimates.
Now, if you look at the subsidies payout – and we have limited information when we are looking at these numbers, subsidies payout growth has outpaced the indirect taxes growth. That should lead to a negative gap. My view is that it should be roughly around a 30-40 bps gap that you should see, at least between the GDP and GVA. Of course, we will see what the actuals are. Hence, even if GVA is closer towards a 6.5% handle, let us say 6.4%, I would expect a 6% GDP growth in terms of the gap.
Q: Subsidies payout was higher you are saying?
Rakshit: Yes, subsidy growth was higher.
Q: Last year was a big fall. Fair enough. So that’s going to come back to bite. Anything from the expenditure side that you would watch out for either private consumption or gross fixed capital formation. I thought net exports would be a decent number, wouldn’t it?
Chachra: On the GDP by expenditure side, if we look at the key to watch would be consumption, given the share in GDP. Consumption, though, will have sort of a steady trend, as also mentioned, urban consumption in the last quarter was muted, but we are seeing signs of pickup on rural or rather rural sort of sustaining some improvement that has happened in the last few months and is building up with the improvement in the kharif or summer crop production as well. So consumption is supported by rural demand, but urban is a drag and therefore we see that steady.
Capex will pick up. So yes, as you mentioned December monthly number for government capex was stellar, three times higher versus the average run rate of spending from April to November in terms of INR billion. Pick up in manufacturing-related sector profits as well, which should sort of correlate with improved capex on the expenditure side.
On net exports, it will be probably a mixed bag. We are seeing a pick up in the services trade surplus, while the merchandise trade deficit was impacted by the revisions as well, but has been a little higher in the December quarter. So if you just balance it out with the current account deficit number, that would probably be making it sort of steady in terms of net exports for the October-December 2024 quarter. I don’t think it will be a big boost to GDP numbers.
Q: What is the exact consumption number you are going with – personal final consumption expenditure?
Chachra: Private final consumption, I will keep it steady with the July-September 2024 quarter minus any revisions to the base in terms of year-on-year (YoY) basis. Government consumption, yes, probably some pickup, given that government spending has picked up.
Q: What should we watch out for when the numbers come?
Rakshit: A couple of things. First of all, there are three data points that will be coming out, and I am calling them data points so they are data releases. One is an October-December 2024 quarter GDP, GVA print. Within that we need to watch out for what is happening in manufacturing services, agriculture should be good.
Second, we would be looking for consumption versus investment. What is moving, and what is not? That is on the October-December 2024 quarter print, and what kind of a pickup are we seeing from the July-September 2024 quarter base?
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The second part is we are going to get the advance or the second advance estimates for 2024-25 (FY25) which was picked at 6.4%. We will have to see – depending on the October-December 2024 quarter numbers, as well as the revisions for the past years the April-June 2024 quarter and the July-September 2024 quarter numbers, where we are standing in terms of the 2024-25 numbers. Whether the government is looking at further acceleration towards upwards of 6.5% or lower. Our number for 2024-25 based on what we have right now, is around 6.1%.
So that is where we are because of the GDP numbers that we have on the October-December 2024 quarter at around 6% and a slight pickup in the January-March 2025 quarter.
Now the third part is in terms of the revised estimates on the 2023-24 (FY24) numbers. And within that, we broadly know the numbers. What is important is we will get the savings and investment numbers. So what is the savings rate? What is the investment rate? We know the gap, which is your current account deficit, which is 0.7% of GDP, so not much change is expected on the savings and the investment front compared to past years. However, important to note the number and the breakup where we are talking about what the private sector is saving and investing, or the household is saving and investing and the government is doing.
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