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The global macro backdrop in 2023 was less hostile for India than thought at the start of the year with global growth better than envisaged and the decline in India’s exports not as sharp as feared. Commodity costs were contained improving India’s terms of trade. Tighter global monetary conditions did not spill as much into India as manifested in narrowing bonds spreads (vis-à-vis the US) and surge in FII inflow.
Domestically, despite the sharp moderation in nominal growth (8.6 per cent in H1 FY24 vs. 16 per cent in FY23 and 18 per cent in FY22), overall tax buoyancy stayed heathy helping the Centre to largely execute its ambitious capex. The real surprise came in the strength of growth in the state government capex. India’s real GDP grew by 7.7 per cent in H1 FY24, driven more by investment than consumption on demand side, and by a stronger growth in manufacturing over services on supply side.
Statistical nuances aside, a strong bank credit growth, GST collection, electricity generation, cement production and steel production are an indication that supply side economy is good. Government infrastructure thrust coupled with ongoing manufacturing sector and real estate recovery in India kept supply side of the economy robust.
Looking ahead, if the general expectation of a ‘modest’ slowdown in developed countries hold true, India’s real growth could be a respectable 6-6.5 per cent in FY25. Outlook on exports is still cautious but unlike earlier, India’s business sector confidence remains unscathed by global headwinds this time around.
Corporate capex spurt
Corporate capex (as gauged from NSE 500 companies) has likely grown in low double digit in FY24 on a base of +20 per cent growth in the last two years. Capacity utilisation for most sectors warrants continued positivity in corporate capex. Government capex growth can moderate now given the strong commitments to fiscal consolidation and limited ability to rev-up tax buoyancy any further.
Healthy balance sheets have meant that the financial sector is able to grow again. RBI’s macro-prudential measures to stem personal loan could lead to moderation in bank credit. Even though we are optimistic regarding private capex, a strong cash flow within corporates implies a reduced need to borrow and invest. We expect 11-12 per cent bank credit growth for FY25.
Consumption demand hasn’t been exciting post Covid, as gauged from volume growth in FMCG, demand for white goods and other retail segments in recent quarters. Auto just bottomed out in 2023 but still lacks peaks of 2018-19. That said, the urban economy was relatively more resilient.
Also, there is always an underlying thesis of changing wallet share, rising penetration and rising middle income in India, which creates a strong demand for few sectors. Airlines, leisure, hospitals, jewellery, e-commerce, and electronics appear to be few such winners in current times. It does appear that consumption-oriented sectors have the weakest topline compared to other segments of demand.
The key to assessing the direction of consumption demand in 2024 is getting a sense of likely cash flow to the households and consumer sentiment. At the margin, we are incrementally more positive on rural India over urban India.
India has seen a considerable upward adjustment to food prices post-Covid offering a high base. There are multiple products like milk, pulses, vegetables, and spices which could see some moderation in inflationary pressures. Likely moderation in global growth should keep crude oil under $90 per barrel and lead to muted fuel inflation and transportation cost in India (but for risk to electricity prices). Goods inflation will likely be contained (~4 per cent) and Services inflation has been fairly range bound at 4-5 per cent in India.
Rate stance
If the current expectations of a softening of headline CPI closer to 4 per cent materialise we could probably see a shift in stance towards neutral with tolerance of additional system liquidity towards the second half of CY24. Expectations around policy easing in India need to be tempered currently, even as the Fed embarks on a rate easing cycle sometime in CY24.
External account backdrop looks benign in FY25, and CAD could stay under 2 per cent of GDP.
Manufacturing sector recovery is keeping non-oil non-gold import elevated.
India’s net services receipts from external activities had grown at an 18 per cent CAGR since Covid and funded 55-60 per cent of trade deficit in last three years vs 33 per cent a decade ago.
A meteoric rise in receipts from other business services (perhaps capturing the GCC inflow) has been fundamental to double digit growth in net receipts.
Despite the likely bond index related healthy FPI inflow overall balance of payment surplus looks modest in FY25. Fresh FDI flows is moderating, and repatriation of past FDI inflows has surged.
An expectation of supported growth alongside disinflation in FY25 rests on two critical assumptions of contained commodity costs and soft landing. India’s balance sheets are healthy and ready for growth but remains susceptible to global growth-inflation dynamics and consequent monetary and liquidity trajectory.
The writer is Chief Economist, SBI Mutual Fund. Views are personal
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