2023 was a year of economic resilience, both for the US economy and India. Stronger Q2 FY24 GDP growth suggests full-year growth will be above expectations. Frontloaded public capex, a missed global recession, steep cascading of input costs and the resilience of urban consumption supported overall growth.
We see 2024 as a year of strong start but will finish weak. Even with the year set to start off on a resilient note, we expect the growth impulses to weaken over the course of the year for four key reasons.
First, India’s growth is still not broad-based. Investments are primarily driven by the government, and private capex is limited to a few pockets. Into the election cycle, we expect the awarding of new infrastructure projects to slow, and the private sector to await the election results, before committing any long-term capital. Second, rural demand remains weak, and is vulnerable from weaker agricultural production this year owing to erratic rains.
Third, the sharp fall in input costs this year led to a significant terms-of-trade benefit for Indian corporates via higher profits. Unless commodity prices continue falling, this will be less of a tailwind next year. Finally, we expect a synchronised global slowdown to dent India’s exports of services, since they are more geared towards the US and Europe, while also weighing on IT jobs and urban consumption. Consequently, we expect GDP growth to moderate to 5.5-6.0 per cent in 2024 from 7.0 per cent in 2023.
inflation
For inflation, we see the waters as choppy, but the ship should remain anchored. Near-term headline inflation is likely to be dominated by vegetable price volatility, but we are also concerned about inflation in the broader food basket. These pressures – particularly for cereals and pulses – are likely to remain for at least the first half of 2024 until the fresh kharif season next year (assuming normal monsoons). Encouragingly, core inflation has fallen significantly in 2023, despite strong growth. We expect core inflation to ease further to 4 per cent and remain around those levels throughout 2024, since lower wage growth and falling inflation expectations suggest underlying inflation is well anchored.
For the RBI, the current macro environment of resilient growth anchored core inflation, yet higher food inflation is the optimal setting for an extended policy pause. That said, if we are right about the growth and inflation outlook in 2024 (growth disappoints below the RBI’s projection and headline inflation trends closer to core at around 4 per cent in H2 2024), then the policy stance will shift towards easing. We expect the RBI to deliver 100bp of repo rate cuts cumulatively starting from August 2024.
The market’s focus for 2024 will be on India’s bond index inclusion and general elections. We expect around $23 billion in FPI debt inflows because of the bond index inclusion, which means that funding the current account deficit should not be a challenge, and the overall BOP should be manageable. Meanwhile, five months is a long time in politics, but opinion polls so far suggest policy continuity in the upcoming Lok Sabha elections. This will be important event for markets, and a weaker victory of the BJP or capitulation in favour of the Opposition alliance, could lead to market disappointment.
Over the medium term, we see India as one of the shining stars in Asia. Positive demographics, relocating supply chains, strong balance sheets and reform momentum mean that India can grow at a compounded annual growth rate of 6.5-7.0 per cent this decade, led by investment and higher productivity.
Overall, while the growth sprint in 2024 faces bumps, India should still lead in the growth marathon.
Sonal Varma is Chief Economist, India and Asia ex-Japan, Nomura, and Aurodeep Nandi, India economist, Nomura