Q2 GDP: Investment growth at 5 qtr high, household consumption slows down

Rajani Sinha, Chief Economist, CARE Ratings, says that on the demand side, there was a sharp jump in investment, led by the Central and state governments, that helped pull up the GDP growth

Amid the front-loading of capital expenditure (capex) by the central government, growth in capital investment accelerated sharply to 11 per cent during the second quarter (Q2, or July-September) -- the highest in five quarters -- from 7.9 per cent in April-June this financial year, the data released by the National Statistical Office (NSO) on Thursday showed.

Gross fixed capital formation (GFCF), a proxy for infrastructure investment, contributed 30 per cent to gross domestic product (GDP) in Q2FY24, as against 29.3 per cent in the previous quarter.

Investment growth above 30 per cent is considered important for driving economic growth.

The rise in the share of GFCF in GDP comes on the back of the Centre’s increased capex, which grew 43.1 per cent to Rs 4.9 trillion till Q2FY24 from Rs 3.42 trillion in the same period last year, the data sourced from the Controller General of Accounts (CGA) showed.

 

“The combined capex of the Union and 26 states grew by 26.7 per cent Y-o-Y during Q2FY24 in view of the impending elections in various states,” said Devendra K Pant, chief economist, India Ratings.

Meanwhile, growth in private final consumption expenditure (PFCE), which is taken as a proxy for household consumption, slowed to 3.13 per cent in Q2 from 5.97 per cent in the previous quarter, partly due to severe slowdown in the rural demand.

However, the share of PFCE in GDP rose to 61 per cent in Q2 from 59.7 per cent in the first quarter.

Besides, for the first half (April-September) this financial year, government final consumption expenditure (GFCF) grew 9.5 per cent and PFCE a modest 4.5 per cent as against the corresponding period of the last year.

Rajani Sinha, chief economist, CARE Ratings, said on the demand side, there was a sharp jump in investment, led by the central and state governments, that helped pull up GDP growth.

“However, there was some moderation in consumption demand possibly due to the delayed festival season this year and weak rural demand. Private consumption could accelerate owing to further improvement in urban demand, led by the festival boost in Q3. However, the outlook for rural demand revival remains clouded amid monsoon deficiency and a likely hit to agricultural production,” she added.

Echoing a similar view, Gaura Sengupta, economist, IDFC First Bank, said both the Centre and state governments had front-loaded capex, which was visible in construction sector growth as its impact was visible on investment growth.

Meanwhile, trade, hotel and transportation, which are contact-intensive sectors, have slowed, despite a pickup in individual travel- and tourism-related expenditure.

“The investment-to-GDP ratio has risen to 35.3 per cent, which is a 12-year high. High-frequency growth indicators showed urban demand had held up with a jump in sales of passenger vehicles, rise in air travel and personal loan growth, and increase in sales volumes of fast-moving consumer goods. That said, rural demand remains weak, reflecting low real wage growth and an uneven monsoon. The impact of the latter is visible with employment demand under the Mahatma Gandhi National Rural Employment Guarantee Act remaining higher than last year.”

Along with the front-loading of capex by the government, it increased its revenue expenditure as GFCE also registered a double-digit growth rate (12.35 per cent) during the quarter.

However, the share of GFCE in GDP fell to 9.8 per cent in Q2 from 10.5 per cent in Q1.