Investment demand at 4-quarter low, consumption remains sluggish

Despite the strong capex push by the central government, gross fixed capital formation (GFCF), which is taken as a proxy for investment demand in the economy, slid to a four-quarter low in Q4 (January-March).

Separately, India’s private consumption demand remained feeble during the March quarter. 

According to the latest gross domestic product (GDP) data, released by the National Statistical Office on Friday, growth in GFCF decelerated to 6.46 per cent in Q4 from 9.7 per cent in Q3.

Earlier, GFCF had grown by 3.75 per cent in Q4 FY23.

Meanwhile, growth in private final consumption expenditure (PFCE), which is taken as a proxy for consumption demand in the economy, marginally decelerated to 3.98 per cent in Q4 from 4.03 per cent in the December quarter.

However, government spending as represented by government final consumption expenditure (GFCE) saw marginal growth during the March quarter (0.89 per cent) from the contraction (-3.22 per cent) seen in the preceding quarter. 

Rajani Sinha, chief economist, CARE Ratings, said in line with the expectations, growth on the expenditure side had been mainly led by the government’s strong capex push, though, the concerning aspect is that private consumption growth has remained feeble.

“We expect the consumption trend is likely to improve as rural consumption gets better with a normal monsoon. Moderation in food inflation would also be critical for a broad-based improvement in consumption trend. An upswing in the private investment cycle would be contingent on sustained improvement in domestic consumption and global growth outlook,” she added. 

Expressing similar views, Aditi Nayar, chief economist, ICRA Ratings, said the sequential slowdown in GDP growth [in Q4] was driven by investment activity, even as private consumption maintained bland growth and government consumption expenditure turned around to a mild growth from a contraction.

As a share of nominal GDP, PFCE accounted for 57.9 per cent for the March quarter compared with 58.2 per cent during the same quarter a year ago. Similarly, the share of GFCF also slid to 31.5 per cent versus 32.3 per cent in the corresponding period last year. The investment share in GDP above 30 per cent is usually considered important for driving economic growth.  

In comparison, GFCE had a 12.2 per cent share in nominal GDP during the quarter compared to 12.8 per cent for the same period last year.

DK Srivastava, chief policy advisor, EY India, said while PFCE growth was still languishing, the main demand side push was coming from investment growth, which had largely been driven by the government’s capital expenditure push.