The Indian economy seems to be in a sweet spot with healthy growth, moderating inflation, strong FII inflows and healthy corporate and banks’ balance sheets. Recent economic data releases showing GDP growth at 8.4 per cent in the third quarter of 2023-24, PMI Manufacturing at a 16-month high of 59.1 in March are adding to economic optimism. Our credit ratio (number of rating upgrades to downgrades) is at a healthy 1.92 in the second half of 2023-24 (as against 10-year average of 1.57), reflecting the good health of the corporate and banking sector. But that’s not to say that all is well. There are still concerns lurking and the economy needs to tread cautiously in the new fiscal year.
Healthy growth, moderate investment
India has recorded above 8 per cent growth in the first three quarters of 2023-24, with chances of full year growth turning out higher than the advance estimate of 7.6 per cent. Growth in GDP has been mainly led by investment, while consumption growth remains weak. Consumption GDP is estimated to have grown by 3 per cent in the year, as against a pre-pandemic growth of 7 per cent (2018-19). This data may come as a surprise to many, given the spending euphoria that we are seeing for items like cars, housing, jewellery and travelling.
But lower price point categories like FMCG and apparels are somewhat feeling the pinch of cautious consumer spending by the masses. The silver lining is that rural demand that had been muted is showing signs of improvement. As per a Nielsen report, FMCG volume growth in rural areas has improved to 6.2 per cent in the second half of 2023 from 2.2 per cent in the first half. Two-wheeler sales, another indicator of rural demand, is also showing improvement. On the assumption of a normal monsoon this year, we can expect an improvement in overall consumption demand. However, we need to be watchful of layoffs (coupled with weak hiring) in the IT sector and the impact of that on urban consumer sentiments.
The government has continued its focus on capex. But a pickup in private investment will be a critical factor for a sustained growth momentum. There has been increased investment by the private sector in areas like steel, cement, petrochemicals, automobile, aluminium and renewable energy. The order book of capital goods companies has also increased sharply in the last fiscal year. With capacity utilisation of the manufacturing sector at 74 per cent (close to the long-term average), we can expect the private capex cycle to accelerate in the coming quarters. The CMIE data on project investment is also showing increased intent to invest by the private sector.
Services-led exports
India’s economic growth in 2023-24 has been mainly led by the manufacturing and services sector, as the agriculture sector suffered from the adverse impact of poor monsoon. Sectors like hotels, auto/auto components, healthcare, realty, iron & steel, pharmaceutical and jewellery retailers have performed well, while chemicals, textile, cut & polished diamonds, etc, felt the pinch of weak external demand.
Even while merchandise exports were weak due to the global slowdown, services exports remained healthy. Apart from software services, a good performance was also seen in business consulting and travel services. Supported by healthy remittances and services exports, we estimate India’s current account deficit at a benign 0.6-0.7 per cent of GDP and at around 1 per cent in 2024-25. We have been seeing very strong FII inflows into the economy, even while net FDI inflows have moderated. FII inflows were at a high of $41 billion in 2023-24 (as against net outflows of $5.5 billion in 2022-23). This has taken India’s forex reserves to a comfortable level of around $643 billion. Strong FII inflows are expected to continue in 2024-25 as we see the impact of Indian government bond inclusion in the global indices. However, this also warrants caution given the volatile nature of these flows.
Inflation and credit
CPI inflation has moderated below RBI’s target upper band of 6 per cent. Core inflation has slipped below 4 per cent in the last three months, with persistent disinflation in the services sector. However, high food inflation remains a concern. There is specifically high inflation in vegetables (30 per cent), pulses (19 per cent) and spices (14 per cent). On the assumption of normal monsoon this year, we expect CPI inflation to moderate to around 4.8 per cent in 2024-25 from an estimated 5.4 per cent in 2023-24. With inflation moderating, the RBI could opt for a shallow policy interest rate cut in the second half of the fiscal year, provided the US Fed also starts to cut rates by then.
Interestingly, even with higher interest rates, the Indian economy has been seeing a rapid rise in retail credit. As a precautionary step, the RBI has increased the bank’s risk weightage for unsecured personal loans. This has led to some moderation in personal loans’ growth, but it remains high at around 18 per cent. This trend is here to stay given the changing consumption and saving pattern in the economy and easy access to credit.
While so far there are no signs of stress in banks’ retail loans, there is a need to remain vigilant on this front. While overall bank credit growth has been strong, the deposit growth has remained relatively weak. This poses liquidity risks for banks while putting pressure on their net interest margins. However, the comforting factor is that banks’ asset quality remains healthy.
Overall, the Indian economy is comfortably placed with GDP growth likely to be around 7 per cent in the ongoing financial year. Structural developments like digitalisation and increased formalisation appear to have pushed India’s potential growth to a higher level. This is an apt time for the government to focus on quality of growth, while remaining vigilant of the lurking risks. This is also an opportune phase for the government to continue the focus on fiscal consolidation (as seen in the interim budget) and reduction in public debt that had shot up during the pandemic. With a new government set to be formed in a few months’ time, we hope that there is higher emphasis on inclusive and sustainable growth.
The writer is Chief Economist, CareEdge Ratings
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Digitalisation, increased formalisation appear to have pushed India’s potential higher, but there is now hope for growth that is sustainable and inclusive
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09.04.2024
The Indian economy seems to be in a sweet spot with healthy growth, moderating inflation, strong FII inflows and healthy corporate and banks’ balance sheets. Recent economic data releases showing GDP growth at 8.4 per cent in the third quarter of 2023-24, PMI Manufacturing at a 16-month high of 59.1 in March are adding to economic optimism. Our credit ratio (number of rating upgrades to downgrades) is at a healthy 1.92 in the second half of 2023-24 (as against 10-year average of 1.57), reflecting the good health of the corporate and banking sector. But that’s not to say that all is well. There are still concerns lurking and the economy needs to tread cautiously in the new fiscal year.
Healthy growth, moderate investment
India has recorded above 8 per cent growth in the first three quarters of 2023-24, with chances of full year growth turning out higher than the advance estimate of 7.6 per cent. Growth in GDP has been mainly led by investment, while consumption growth remains weak. Consumption GDP is estimated to have grown by 3 per cent in the year, as against a pre-pandemic growth of 7 per cent (2018-19). This data may come as a surprise to many, given the spending euphoria that we are seeing for items like cars, housing, jewellery and travelling.
But lower price point categories like FMCG and apparels are somewhat feeling the pinch of cautious consumer spending by the masses. The silver lining is that rural demand that had been muted is showing signs of improvement. As per a Nielsen report, FMCG volume growth in rural areas has improved to 6.2 per cent in the second half of 2023 from 2.2 per cent in the first half. Two-wheeler sales, another indicator of rural demand, is also showing improvement. On the assumption of a........
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