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India’s Q2 GDP Growth Exceeds Expectations at 7.6%

India GDP growth in Q2 FY24 beats estimates at 7.6% - Times of India

Introduction:

The article reports on India’s better than expected 7.6% GDP growth in the September 2022 quarter (Q2 of financial year 2023-24). It provides details on performance of different sectors of the economy.

Analysis of this news for a layman:

GDP or Gross Domestic Product refers to the total value of all goods and services produced in the country. It is an important indicator of the economic health and growth of a country.

The article states that India’s GDP grew by 7.6% in July-September 2022 period compared to same period last year. This growth rate was higher than the expectations of most economists and analysts which was around 6.7%.

Some key highlights:

Manufacturing sector saw a sharp rebound and posted almost 14% growth, the highest in 9 quarters. This indicates a strong revival in industrial and manufacturing activities.
Investment demand also recovered as reflected in 11% growth in gross fixed capital formation. This bodes well for future growth.
However, private consumption demand was muted at 3.1% growth indicating that rural and consumer demand is still weak.
Farm sector growth moderated to 1.2% due to uneven monsoon rains this year. This could have impacted rural incomes.
Overall, the higher than expected GDP growth indicates the economy is resilient despite global headwinds. But consumption especially in rural economy needs support.

Original Analysis:

The higher than expected 7.6% GDP growth in Q2 FY2023-24 is a positive surprise and defied the economic gloom and doom predictions by many analysts. This robust growth has been driven by a sharp revival in manufacturing and rebound in investments.

However, this growth momentum may moderate in coming quarters for a few reasons. First, the boost from manufacturing may gradually taper off going ahead. While demand conditions have improved, input costs are still high for producers. Second, private consumption especially in rural areas remains weak and uneven monsoons have impacted agriculture. This may constrain overall demand in the economy.

Moreover, the global economic outlook is turning increasingly recessionary. With major markets like US and EU facing slowdown, India’s exports could take a hit. Also, if global inflation and interest rates continue rising, it may limit RBI’s ability to support domestic growth through rate cuts.

So in summary, while higher growth this quarter is encouraging, sustaining this above 7% trajectory over entire FY2024 looks challenging. Government has limited space for stimulus measures and will need to focus more on supply side reforms and infrastructure spending to drive growth. The RBI can at best maintain a calibrated approach without aggressive rate cuts.

Impact on Retail Investors:

The higher than expected GDP growth is positive news for retail investors in multiple ways. First, corporate earnings outlook seems brighter now and investors can expect better returns from equity markets in medium term. Manufacturing and bank stocks in particular could see improved performance.

Second, higher growth signals overall economy is doing well and is on recovery path. This improves confidence among retail investors. Also with upcoming budget, there are now higher chances of more business and investor friendly measures by the government rather than populist schemes.

However, investors should avoid getting complacent or over-optimistic. Inflation still remains a concern area and RBI may maintain status quo on rates for longer. Also, rural and consumption demand is still tepid. This could impact sectors like FMCG, agriculture etc.

In summary, retail investors should focus on sectors and segments directly benefiting from capex cycle, manufacturing and urban consumption demand. Some examples are industrials, cement, private banks and consumer durables. But valuations in many spaces are already stretched. So invest systematically rather than lumpsum purchases. Maintain adequate liquidity and avoid over-exposure to small caps only.

Impact on Industries:

The high GDP growth has been driven by few sectors like manufacturing, construction and mining. Thus companies in these sectors will directly benefit in near term.

In particular, manufacturing companies across autos, capital goods, metals, chemicals etc stand to gain as volume growth improves. We could see earnings upgrades happening for many industrials, auto ancillaries.

Similarly, companies into construction and infrastructure projects will see order inflows and better execution. This will drive earnings growth.

The services sector performance has been mixed – while financial services slowed down, utility services saw good growth. Going ahead, transport, travel and hospitality sectors could benefit as economy opened up further.

But companies dealing in agriculture and rural segment may continue facing business challenges due to uneven monsoons and low crop output this year. Also, FMCG companies dependent on rural demand need to be watched closely.

Thus investors need to adopt a nuanced stock specific approach rather than broad generalisations. Export dependent sectors in IT, pharma and textiles remain vulnerable to global economy downturn.

Long Term Benefits & Negatives:

The higher GDP growth, if sustained around 7% annually over next few years, can provide substantial long term gains for the Indian economy.

Firstly, the dream of making India a $5 trillion economy by 2025 is achievable with such high and consistent growth trajectory.

Secondly, sustained high growth for long period is essential to create enough jobs for India’s young population and solve the unemployment problem over next decade.

Thirdly, higher growth for longer period helps in equitable distribution of income and alleviating poverty at a faster pace.

However, few downside risks also need attention-

Global economy may enter prolonged recession due to high inflation and interest rates. This can impact India’s exports sector directly.
Widening trade deficit driven by high imports of oil, coal and gold. Needs fiscal prudence.
Despite growth upside, private investment cycle is still gradual. Quicker revival here is vital for long term growth.
Thus in summary, while 7% plus GDP growth currently is a big positive, we need bold reforms and counter-cyclical fiscal measures to sustain it over long run.

Short Term Benefits & Negatives:

The higher Q2 FY2024 GDP growth has provided short term boost to business and investor sentiment. It indicates the economy’s resilience against global headwinds.

Positives in short term:

Improved manufacturing performance will lead to job creation, income growth and boost consumer spending going ahead.
Higher tax collections for government due to better corporate earnings. This provides fiscal room for public spending.
Strong growth reaffirms India’s positioning among fastest growing economies when global economy stutters. This uplifts investor confidence.
However, few problem areas persist-

Rural and agriculture sector remains weak link, uneven rains could stoke food inflation ahead.
Exports growth expected to decline with major trading partners US, Eurozone facing growth issues.
Current account deficit already too high, led by high import bills. Could constrain policy choices.
Job creation and wage growth still not broad-based to spur mass consumption.
Thus RBI and government cannot afford to be complacent despite Q2 GDP uptick. Consumption, exports and agriculture sector need close monitoring and appropriate interventions in coming months.

Companies will gain from this:

Here are some of the major companies across sectors that could benefit from current high GDP growth phase of Indian economy:

Larsen & Toubro (L&T): Leading infrastructure & capital goods conglomerate, to gain from higher public and private capex. Order book set to rise.
Ultratech Cement – Largest cement maker, will benefit as housing and infrastructure projects pick up pace. Utilization levels could improve.
Tata Motors – Commercial vehicle sales poised to grow as infrastructure activities increase. Can also gain shares from competitors.
ICICI Bank – Major private bank, credit growth will accelerate as corporate and retail loans rise. Asset quality outlook also positive.
Infosys – Growth in manufacturing and rising investments bode well for software services providers like Infosys. More outsourcing contracts likely.
SBI – India’s largest PSU bank, growth in deposits and retail loans to remain strong. Also restructured assets quality showing improvement.
Titan Company – Leading jewellery and watch maker, urban consumption demand set to make recovery. Festive sales could be robust.
Asian Paints – Real estate upcycle, higher construction to aid dominant paint manufacturer. Volume and sales growth to accelerate after tepid few quarters.
Thus companies with linkages to manufacturing, housing, infrastructure and urban consumption theme well positioned currently to leverage high GDP growth. Their earnings and stock price outlook seems constructive.

Companies which will lose from this:

While most sectors stand to gain from the high GDP growth, few spaces could face challenges –

Fertilizer companies like Coromandel International – Agri and farm sector distress due to uneven monsoons can impact fertilizer usage and sales.
Bajaj Auto – Rural motorcycle demand may continue to remain tepid impacting sales. Also exports could moderate due to global economy slowdown.
Dabur India – Leading FMCG company faces sluggish rural offtake for next few quarters denting volume growth. Stock expensive.
Coal India Limited – Coal imports on rise leading to market share loss for domestic coal producers like CIL. ESG focus also poses headwinds.
Tata Power and NTPC – Power utilities to bear high imported coal cost pressures leading to margin compression. High debt levels also a concern.
InterGlobe Aviation – Jet fuel prices spikes due to global supply concerns can severely impact margins for airline operator Indigo.
Aurobindo Pharma – USFDA issues continue to plague the stock. Growth to remain tepid as US generics competition intensifies.
Tech Mahindra – IT sector facing growth and margin headwinds led by potential US recession. Tech Mahindra stock valuations still expensive.
Thus exporters, rural economy plays like agri, FMCG, pharmaceuticals, IT services companies seem more vulnerable currently compared to domestic cyclicals. Stock selection calls for caution in the above spaces.

Additional Insights:

Government finances are in good shape with tax collections picking up. This provides room for higher infra and rural spending in upcoming budget.
Outlook for bank credit growth seems robust – retail, services and industry credit rise to aid financials sector performance.
Global oil prices easing off is a huge relief. Current account deficit could moderate supporting INR stability.
Conclusion:

The better than expected Q2 FY2024 GDP growth print indicates resilience of Indian economy. Growth outlook for FY2024 has improved. While global headwinds persist, India may achieve close to 7% average real GDP growth this fiscal – highest among all major economies. However, sustainability beyond short term needs policy support. Domestic demand, private investments and exports – all need to fire in unison over medium term to realize India’s economic potential.

A proper citation to ensure consistency and provide more detailed information about the source: “Surprise Boost: Economy Grows 7.6% in Q2, Beating Estimates.” ET Bureau, Economic Times, 1 Dec. 2023, https://economictimes.indiatimes.com/news/economy/indicators/surprise-boost-economy-grows-7-6-in-q2-beating-estimates.

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