2023 ends on a positive note for the Indian economy. GDP growth in the second quarter of 2023-24 was above market expectations of 7.6%, driven by a strong recovery in the manufacturing sector, even as services sector growth remained healthy. Investment has seen a strong recovery with increased capex by the central and state governments. High-frequency economic indicators such as GST collections, key sector growth, car sales and passenger traffic also reflect healthy economic growth. Inflation is on a downward trajectory, with Consumer Price Index (CPI) inflation hovering around 5%. The corporate sector is also in good shape as reflected by our debt ratio of 1.67 (number of enhanced downgrades) in the first half of 2023-24, better than the long-term average of 1.5. The key question for 2024 is whether India’s growth momentum will sustain. Let’s take a closer look:
2023 ends on a positive note for the Indian economy. GDP growth in the second quarter of 2023-24 was above market expectations of 7.6%, driven by a strong recovery in the manufacturing sector, even as services sector growth remained healthy. Investment has seen a strong recovery with increased capex by the central and state governments. High-frequency economic indicators such as GST collections, key sector growth, car sales and passenger traffic also reflect healthy economic growth. Inflation is on a downward trajectory, with Consumer Price Index (CPI) inflation hovering around 5%. The corporate sector is also in good shape as reflected by our debt ratio of 1.67 (number of enhanced downgrades) in the first half of 2023-24, better than the long-term average of 1.5. The key question for 2024 is whether India’s growth momentum will sustain. Let’s take a closer look:
Global Uncertainties Persist: The New Year will see weakness in overall global growth. The IMF expects global GDP growth to slow to 2.9% in 2024, slightly below its 2023 estimate. Some major economies, such as the US and EU, will see interest rates remain high for a longer period of time, as indicated by their central banks. This will freeze India’s cargo exports in 2024, just like this year. Note that while services exports remain healthy, their growth is slowing; It fell to an average of 5.5% in the last three months, compared to an average of 24% in the first three months of the year.
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Global Uncertainties Persist: The New Year will see weakness in overall global growth. The IMF expects global GDP growth to slow to 2.9% in 2024, slightly below its 2023 estimate. Some major economies, such as the US and EU, will see interest rates remain high for a longer period of time, as indicated by their central banks. This will freeze India’s cargo exports in 2024, just like this year. Note that while services exports remain healthy, their growth is slowing; It fell to an average of 5.5% in the last three months, compared to an average of 24% in the first three months of the year.
Increased geo-political divisions: While the Russia-Ukraine war continues, the world economy has been affected by the Israel-Hamas war this year. Geo-political concerns will continue in 2024 and any worsening of geo-political divisions will pose a risk to commodity prices. But since China’s economy will remain weak, demand-side pressure on these prices will remain weak. Climate-related risks and their impact on prices of agricultural commodities is another factor we need to address.
Strong urban consumption expected but rural demand shaky: India sees strong consumption demand in urban areas, reflected by strong passenger car sales, travel and tourism and an increase in busy retail sales. However, rural demand has been dampened by FMCG offtake. This year’s erratic monsoon will affect rural demand recovery. According to the first advance estimates, kharif crop production has declined by 4.6% year-on-year in 2023 and rabi season sowing has also been adversely affected. Hence, high food inflation is likely to persist, further reducing rural demand.
High consumer borrowing will continue: India is witnessing a sharp rise in personal loans. The Reserve Bank of India (RBI) has cautiously introduced stringent capital requirements in the face of exposure of banks and NBFCs to unsecured personal loans. Although this may moderate their growth somewhat, the overall trend of higher personal loan growth will continue. This appears to be a structural change in the economy—in line with the higher aspirations among the youth and their growing consumption. This trend will be supported by digitization trends across the Indian economy.
Private investment likely to pick up gradually: The key question now is whether private investment will pick up meaningfully in 2024. Order books of capital goods firms are filling up. From a representative sample of five such companies, order books grew by 15% in the first half of this fiscal, against a compound annual growth of 5% in the previous four years. It could mean going forward. With the sharp fall in private investments reported in the second quarter of this fiscal (according to CMIE), there are concerns that private investors may be wary of policy uncertainty with general elections looming in 2024. Decisive orders in the five state elections held recently will give confidence to investors.
RBI May Move Towards Easing Monetary Policy: Due to high food inflation, RBI is likely to remain cautious. However, with CPI inflation nearing its 4% target, rate cuts could be considered from the second quarter of 2024-25. However, this is likely to be a shallow rate cut cycle.
China Plus One Benefits: Given the wide gap between the US and China, India was expected to benefit from 'China Plus One’ corporate strategies. Although some investment and trade has come, the impact so far has been modest. US imports from India rose by $31 billion between 2018 and 2022, while imports from Vietnam rose by $78 billion. 2024 is unlikely to see much change on this front, but over time, India is likely to benefit given the high level of interest shown by global players in 'Make in India’.
India enters 2024 optimistically with high growth and moderate inflation. Uncertainties and lingering concerns surround a volatile global environment, weak domestic rural demand and a slow increase in private investment. But overall, the mood is optimistic. As our economy moves to a more sustainable growth path, our focus must shift towards broad-based and inclusive growth.
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