India’s economy showcased remarkable resilience as it recorded a higher-than-expected growth rate of 6.1 percent in the fourth quarter (Q4) of FY23, surpassing analysts’ predictions. This robust expansion was primarily driven by the manufacturing and construction sectors, which outperformed expectations and reflected sustained domestic demand amidst a gloomy global economic outlook. The encouraging Q4 performance led to an upward revision of the overall economic growth forecast for FY23, now pegged at 7.2 percent, compared to the previously estimated 7 percent.
Manufacturing and Construction Sectors Surpass Expectations
Contrary to earlier projections, the manufacturing sector rebounded strongly in the March quarter, achieving a growth rate of 4.5 percent. This recovery was attributed to improved margins during the three-month period, partially driven by a sustained moderation in input costs. Additionally, the construction sector demonstrated impressive double-digit growth of 10.4 percent in the same quarter, despite facing challenges such as aggressive interest rate hikes by banks and higher retail inflation. These robust performances indicate the resilience and strength of these sectors within the Indian economy.
Agriculture and Services Sectors Contribute to Growth
Despite unseasonal rain in March, the agricultural sector registered a robust growth rate of 5.5 percent during the quarter. This growth underscores the sector’s ability to withstand adverse weather conditions and contribute significantly to India’s overall economic expansion. The services sector also picked up momentum sequentially, recording a growth rate of 6.9 percent, primarily led by double-digit growth in the trade, hotels, and transport sector.
Private Spending Remains a Challenge
While overall economic growth has been strong, private final consumption expenditure, or private spending, experienced marginal acceleration on a sequential basis in Q4, reaching 2.8 percent. This remains the weakest link in the economic recovery, indicating the need for further improvement in consumer sentiment and purchasing power. On the other hand, government spending recovered, growing at 2.3 percent after two consecutive quarters of contraction.
Investment Demand Shows Positive Signs
Gross fixed capital formation, a representation of investment demand in the economy, demonstrated sequential growth of 8.9 percent in the fourth quarter. This signals the sustained focus of the government on capital expenditure and the initial signs of a pickup in private investment. Furthermore, the negative impact of the trade balance (net exports) was largely mitigated in the March quarter due to strong growth in services exports and reduced imports, with imports declining by 90.4 percent compared to the same quarter a year ago.
Outlook for FY24 and Beyond
Despite the encouraging growth performance in FY23, economists expect the momentum to moderate in the next fiscal year, FY24. Factors such as the normalization of the base effect, slowing domestic discretionary demand, subdued external demand, and financial uncertainties contribute to this cautious outlook. Experts predict that growth may moderate to 6.1 percent in FY24, considering these factors along with potential risks to agriculture and rural income posed by El Nino conditions during the monsoon.