GDP growth in the second quarter surprised to the upside. Following a good growth rate of 7.8 percent in the first quarter, the second quarter figure of 7.6 percent growth was much higher and far above expectations. This brings first-half GDP growth to a healthy 7.7 percent. Despite projections for a slowdown in the second half, experts believe India will outperform other large economies this fiscal year.

We continue to expect GDP to decelerate in the second half due to a deepening global slowdown; the lag effect of domestic rate hikes, which will be fully seen in the second half of this fiscal year; and irregular weather and an El Nio event, which will dampen agricultural growth prospects. According to preliminary Ministry of Agriculture forecasts, kharif production will be 4.6 percent lower than previous year. Despite a slowdown in the second half of the fiscal year, India is likely to outperform other global economies this year.

YoY growth in India's GDP fell slightly sequentially to 7.6 percent in Q2FY2024 from 7.8 percent in Q1FY2024, exceeding both our (7.0 percent) and the consensus expectation for the quarter. The manufacturing sector was largely responsible for the surprise, with growth rising to a nine-quarter high of 13.9 percent in Q2 from 4.7 percent in Q1, owing to a favorable base, an increase in volume growth, and an improvement in profit margins due to ongoing deflation in input prices. The construction sector's development also surprised on the positive side.

The stronger-than-expected industrial performance offset the sharp decline in the services sector and the expectedly weak performance in agriculture, accounting for up to 52% of GVA increase in Q2 FY2024. On the spending side, while GFCF and GFCE increased to double digits in Q2 FY2024, export growth became positive in the quarter, boosting GDP growth.

Looking ahead, we expect GDP growth to slow markedly in H2 FY2024, given to ongoing challenges such as the normalizing base, a dismal outlook for agri output and rural demand, lackluster global growth, narrowing commodity price differentials, and transmission of prior monetary tightening. Furthermore, a likely slowdown in government capex activity as we approach the Parliamentary Elections could restrain growth outcomes. Given the better-than-expected Q2 results, we are increasing our FY2024 growth prediction to 6.2 percent from 6.0 percent.