Even as the curtains come down on a tumultuous year underpinned by a slowdown in the global economy, the Indian economy's growth acceleration in H1 of FY24 provides a cheering contrast to India comfortably expected to achieve GDP growth of over 6.5 percent in FY24. According to the finance ministry's half-yearly review, India emerged as the fastest-growing major economy in H1 of 2024 with better-than-expected growth in the 2nd quarter of fiscal 2024.
Globally, however, trends have been mixed with geopolitical tensions, tighter monetary stance, weakening global economic activity and an increase in policy rates reducing inflation but not enough to bring it down to country targets, the review notes. The report warns of prolonged monetary tightening that could result in even lower growth in global output.
As the momentum gained in Q2 of FY24 is likely to be sustained in Q3, the report creates an optimistic story for India among various domestic and international firms that have been prompted to upgrade their GDP growth forecasts for FY24. India's real GDP grew at a healthy 7.6 percent year-on-year in Q2 of fiscal 2024.
Not only was this growth higher than professional forecasters' average forecast of 6.8 percent, but their highest estimate was 7.4 percent. Resilient performance led to real GDP growth of 7.7 per cent in H1 of FY24, prompting the RBI to revise its full-year growth forecast to 7.0 per cent from 6.5 per cent, the review observed.
The finance ministry has been flagging trends that indicate continued momentum in the coming months. Both consumption and investment picked up the growth rate in H1. Government capex has increased the rate of investment while private investments remain promising. Strong domestic demand has consequently fueled a significant increase in value addition of manufacturing and services.
Besides, high-frequency indicators for October and November 2023 reflected strong economic activity and manufacturing and services PMI remained in the expansion zone for October and November. IIP's October 2023 seals highlight sustained growth in manufacturing activity.
Also, sentiment in the services sector is upbeat, buoyed by an uptick in the tourism and hotel sector fueled by leisure travel, business travel and social events. The finance ministry expects consumption demand growth to remain sustained, urban demand conditions, resilient with higher growth in vehicle sales, fuel consumption and UPI transactions and rural demand, reflecting strong growth in two- and three-wheelers. Sales.
Signs of strengthened rural demand are evident in growth in fast-moving consumer goods (FMCG), two-wheelers and tractor sales. An increase in real rural wages, supported by a decline in inflation, has further contributed to strengthening rural consumption. Also, higher kharif production and improved Minimum Support Price (MSP) have increased rural incomes and strengthened rural consumption.
Citing CVoters' latest quarterly consumer confidence report, it highlights that rural India is more confident than urban India, based on a November 2023 survey of 12,800 respondents representing all socioeconomic, age and ethnic groups in the country.
There is a steady and consistent rise in the proportion of respondents who say their quality of life has improved over the past year. Also, the majority of consumers have experienced an increase in income or stability in household income. Most of the respondents (both rural and urban) expect their household income to increase in the next three months.
The challenges felt by urban and rural India are similar. Consumers from rural India do not feel increasing distress than those from urban India. Raising an optimistic outlook for India's external sector, the review underscored the relatively stable Indian rupee and adequate foreign exchange reserves against the US dollar and other major currencies, as seen in the November releases of trade balances for both services and merchandise. .
Resurgence of foreign portfolio investments from November 2023 onwards and a general recovery in FY24 vis-à-vis FY23. Foreign investment inflows helped Indian stock market indices climb new highs, reflecting broad-based confidence in growth among domestic and foreign investors over growth prospects. Risks to growth and stability mainly emanate from outside the country.
On the other hand, weakness in global trade emerging from global conflicts and slowdown in global manufacturing led to a contraction in India's merchandise exports and imports in H1 of FY24, but this has improved the trade deficit. Given the growing surplus in the services trade account, the current account deficit is expected to narrow in H1 of FY24.
Foreign portfolio investments (FPIs) turned into net buyers during H1 of FY24, as opposed to being net sellers during H1 of FY23, further fueling optimism. Amid global fiscal risks, the government is carefully monitoring public spending to achieve fiscal consolidation.
To this end, spending has been re-prioritized towards the immediate need to protect the vulnerable. However, the Finance Ministry assures that the re-prioritisation does not compromise the government's long-term objective of strengthening manufacturing.