NEW DELHI: Rising government spending and consumption on the back of national elections, geopolitical uncertainties emerging from peaks seen this year and a strong prospect of a 7% average expansion in the economy could be the defining features of the new calendar. According to economists, the year starts on January 1.
After a 7.7% expansion in the April-September period this year, economists expect the economy to maintain growth momentum at a comparable pace in the coming quarters. According to EY's Chief Policy Advisor TK Srivastava, the Indian economy is expected to expand by 7% during the January-December 2024 period. Looking at FY25, growth is expected to be at least in the 6.5 range. -7.0%, Srivastava said. „Overall, there will be positive vibrations in the economy,” Srivastava said.
A key development expected next year is the commencement of the Sixteenth Finance Committee deliberations, which will define Centre-State fiscal relations in the five years to 2026. The commission will hold detailed discussions across the country to decide on the states' share of the central government's divisible tax revenue and how it should be distributed among the states. The commission is expected to hold a consultation soon after the elections.
2023 saw the Indian economy as the world's fastest growing major economy as a bright spot, while the global economy showed signs of volatility and slowdown, albeit unevenly across geographies. Developed economies also faced high inflation and high interest rates. On December 8, the Reserve Bank of India (RBI) revised its forecast for India's economic growth to 7% in FY24 against its earlier estimate of 6.5%. The expansion beat expectations of 7.6% in the second quarter of this fiscal year supported by double-digit growth in government spending and investment in fixed assets and double-digit output growth in manufacturing and construction. According to the RBI, household consumption is supported by sustained urban demand and a gradual shift in rural demand. The economy's 7.6% expansion in the second quarter was a big improvement from the 6.3% growth recorded in the same period of the previous fiscal year. India's economy grew by 7.8 percent in the first quarter of the current financial year.
Economists in government and outside agree on the need for private sector investment to accelerate further. Debopam Chowdhury, Chief Economist at Piramal Enterprises Ltd, said growth is largely driven by public capital expenditure, which empirically has a very high multiplier effect on the rest of the economy.
„However, certain other engines of the economy will have to pick up to ensure the sustainability of this high growth. As per the September quarter data, private consumption, agriculture and services sectors seem to be slipping on a slower track. A revival in private capex could be a catalyst for these remaining growth engines,” Choudhury said.
„Growth slowing to 6.5% in FY25 will further delay India's full recovery from the income losses due to Covid. RBI's own estimates suggest that it will take 7-7.5% sustained growth over the next 8-9 years to restore India's GDP to its pre-Covid trajectory,” it said. He added.
In October, the International Monetary Fund (IMF) revised India's economic growth forecast for the current fiscal year to 6.3% from 6.1%, due to strong domestic consumption, and lowered its growth forecasts for China and the Eurozone. Following the note, other firms such as Morgan Stanley, Citi and Goldman Sachs also raised India's GDP growth forecasts for FY24. While Morgan Stanley revised India's GDP growth forecast target by 50 basis points to 6.9% for FY24, Goldman Sachs revised its calendar year growth forecast by 20 basis points to 6.7%. Citi said the economy would grow 50 basis points to 6.7% in the fiscal year, up 50 basis points from its previous forecast.
Retail inflation as measured by the Consumer Price Index (CPI) saw a sharp spike this year. After rushing to a 15-month high of 7.4% in July, inflation hit a four-month low of 4.87% in October and 5.5% in November on rising food prices.
To deal with rising prices, the government strengthened buffer stocks for essential food items, conducted periodic open market releases, imported certain commodities such as onions and prevented hoarding through stock limits. Between September and November, CPI-based inflation remained within the RBI's tolerance range of 4-6%. However, food prices remain a concern, posing inflationary risks. At its latest rate-setting meeting in December, the central bank kept the repo rate unchanged at 6.5%.
Audits of companies related to Goods and Services Tax (GST) have picked up pace this year, leading to notices being sent to many businesses regarding potential additional tax liability. The GST Council, the federal indirect tax body, amended the tax law to ensure that online cash gaming sites, casinos and horse racing clubs pay 28% GST on betting amounts. „The (online cash gaming) sector is looking forward to this tax relief and expects that only revenue generated by gaming operators will be taxed and the rate will be reduced from 28% to a more reasonable rate,” said Shashi Mathews. Partner at law firm INDUSLAW. The GST Council will review the new tax regime for these companies next year.
Policy makers are expecting more acceptance of the new Personal Income Tax rule, which has been sweetened in the Union Budget for FY24 and the Personal Income Tax returns will show if it is due next July.
On trade, Indian exports were hit by global growth and slowing consumption, but services exports turned positive in September and merchandise exports in October. India's overall exports of goods and services during the April-October period this year stood at $437.54 billion, slightly lower than the previous year's period.
Export ban on key commodities like wheat, atta, non-basmati white rice and export restrictions on sugar affected export growth. Exports of non-basmati white rice fell to $2.7 billion in 2023-24, compared to $6.35 billion in the April-September period, and basmati rice exports halved to $2.58 billion in the April-September period this year. $4.78 billion in the previous year period. The ban was imposed on 20 July 2023 to reduce the domestic price of non-basmati rice.
India's trade deficit narrowed to $57.64 billion in April-October this fiscal. This was up from $89.86 billion in the same period a year ago.
„We saw our exports stop declining in September and turn positive in October, and demand-driven indicators for consumer goods and machinery are promising for the next few months,” said Ajay Sahai, director general of the federation. Export Enterprises of India (FIEO).
The global economy is reeling from rising inflation and high interest rates, particularly in Europe and the US, India's biggest export markets. However, going forward, global trade is expected to rebound on the back of better economic growth in major advanced economies. The Export-Import Bank of India (Exim Bank of India) has estimated India's merchandise exports to grow 6.3% year-on-year to $111.2 billion in the third quarter of FY24 (October-December 2023), on the back of a modest increase in global demand. During the festive season.
The EU-India FTA, which has completed six rounds of discussions, is expected to see the next round of discussions in February next year, while the UK-India FTA is now at an advanced stage of negotiations and a 14th round of negotiations is scheduled. Should start in January. India is also working on resolving a WTO import duty dispute with the European Union on certain products such as mobile phones and components, integrated circuits and optical equipment. The WTO dispute panel ruled that India's tariffs on these goods violated global trade norms.
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