2024 will be a critical year for India. The national elections will be held in April-May. Its results will be closely watched as the outcome will influence the policy framework. 2024 could also be the third year in a row that the country emerges as the fastest-growing large economy in the world. Expectations are high. What do we need to watch out for?
First, the trajectory of interest rates. In India, this issue has been raised, though a bit prematurely, with one member of the monetary policy committee opining that it’s time to lower rates. The question is: When and to what extent? Going by the RBI’s forecasts, inflation would be around 5 per cent till the first quarter of 2024-25. This would make it hard to lower rates. Perhaps space will open up when inflation falls to less than 5 per cent, which as per the RBI’s forecasts is likely in the second quarter after the new government is sworn in. However, the average repo rate over the past decade has been around 6-6.5 per cent. The reduction to 4 per cent was due to abnormal circumstances, and hence easing rates now will simply mean going back to trend. Further, with the inflation rate likely to be around 5 per cent, maintaining a real repo rate of 1 per cent will mean that there can be at most 50 bps cuts in the policy rate.
Second, the Union budget tabled on February 1 will be a vote on account. Hence, no significant decision can be taken. Of interest would be the route taken once the new government is in place. The growth projection will be the first number that will be tracked, followed by the fiscal deficit. A deficit of 5.9 per cent is still very high compared to the goal of 3 per cent, which has been a mirage even in the best of times. A 4.5 per cent target is a compromise at best for 2025-26. Also keenly tracked will be the quality of expenditure. The question is whether the capex momentum sustains.
Third, the monsoon will also be critical. More so, when there is a constant lament from corporates that while urban demand is up, the same cannot be said for rural demand. While agriculture employs a sizeable labour force but accounts for a lower share of value-added, there are linkages between the farm and the non-farm sector. If the kharif harvest is better than that in 2023, it will be good news for the industry as well as GDP growth. The two-wheeler, FMCG and tractor industries would in particular be tracking the progress of
the rains.
Fourth, considering the performance of the economy so far, forecasts for 2023-24 have been revised upwards. While there is a tendency to understate projections, to begin with, considering that the global economic situation has improved and with the shocks of the war being absorbed by nations, there is no reason for growth to be dramatically lower. Sustaining the current growth momentum will be good news, but crossing the 7 per cent level will be a psychological boost.
Fifth, pertains to private investment. So far while the government has been seeing green shoots, CEOs have only been talking of making investments. The investment rate appears to be stagnant going by the fundraising pattern. Further, investments have been in a narrow band of industries like aviation and hospitality in the services space and infrastructure-related industries like steel and cement in the manufacturing segment. People have been talking for years now about higher government capex crowding in private capex. But there has not been much to show.
Sixth, the performance of the corporate sector is hard to predict. Last year, firms’ sales grew due to pent-up demand. But profits came under pressure as input costs rose sharply. This year, the trend so far shows that while firm sales have gone down, profits have risen with input prices cooling. On a conservative basis, one can assume that both variables will be stable next year. This will have implications for the stock market.
Considering that the economy is said to be on the cusp of a takeoff, it will surely be an interesting year to watch.
The writer is Chief Economist, Bank of Baroda and author of Corporate Quirks: The darker side of the sun. Views are personal
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Indian economy in 2024: On the cusp of take-off
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01.01.2024
2024 will be a critical year for India. The national elections will be held in April-May. Its results will be closely watched as the outcome will influence the policy framework. 2024 could also be the third year in a row that the country emerges as the fastest-growing large economy in the world. Expectations are high. What do we need to watch out for?
First, the trajectory of interest rates. In India, this issue has been raised, though a bit prematurely, with one member of the monetary policy committee opining that it’s time to lower rates. The question is: When and to what extent? Going by the RBI’s forecasts, inflation would be around 5 per cent till the first quarter of 2024-25. This would make it hard to lower rates. Perhaps space will open up when inflation falls to less than 5 per cent, which as per the RBI’s forecasts is likely in the second quarter after the new government is sworn in. However, the average repo rate over the past decade has been around 6-6.5 per cent. The reduction to 4 per cent was due to abnormal circumstances, and hence easing rates now will simply mean going back to trend. Further, with the inflation rate likely to be around 5 per cent, maintaining........
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