India's Economy: Steady Ship, Rough Sea, Long Way To Go

As global economies brace for a slowdown, India’s macro fundamentals look resilient, for now, with a steady growth profile, inflation in check and a comfortable external sector balance. However, risks over the next three to six months will be from a probable erratic monsoon, a broad-based consumer demand slowdown and a possible US recession.

While the long-term prospects remain strong, Kotak Mahindra Bank in a report stated that the investment cycle is currently narrow-based and the pickup will be more gradual than expected.

The bank remains constructive on India’s economic prospects. "We pencil in FY2024 GDP growth at 5.8 per cent (some global slowdown impact and some weakness in consumption). We estimate CPI inflation at 5 per cent (with an upside of 30-40 bps in case of weak monsoons)," it said.

It also said that the RBI should maintain the status quo for the rest of FY2024 as the domestic and external sector situation remains balanced. "We estimate CAD/GDP at one per cent in FY2024, which should keep the India rupee range-bound around current levels," it added.

Amidst these global spillovers, India’s real gross domestic product (GDP) expanded by 7.2 per cent in FY23, the highest among major economies, according to the annual economic review 2022-23 report of the Finance Ministry.

Centre's report stated that India’s economy has sustained its growth momentum in FY23 on account of its strong macroeconomic fundamentals and the prompt policy action by the government and the RBI. Interestingly, the ministry in the report stated that the latest estimate of real GDP turned out to be higher than the second advance estimate released in February 2023. 

"The higher annual growth was driven mainly by better-than-expected growth in the fourth quarter of the fiscal year. The performance of India’s real GDP in Q4 of FY23 stood out compared to other countries," it mentioned.

The share of private consumption in GDP declined from 61.6 per cent in Q3 of FY23 to 55 per cent in Q4 of FY23, according to a report. The annual economic review report stated that the decline is partly because capital formation growth spurted in the fourth quarter.

The president of the PHD Chamber of Commerce and Industry (PHDCCI), Saket Dalmia said that India's economic activity remains robust as its economy GPS index witnessed a growth of 13.7 per cent in June 2023. Dalmia added that the demand trajectory in the economy remains intact as passenger vehicles, with compact cars and utility vehicles grew around six per cent year-on-year (YoY) at 3,13,360 in June 2023 from 2,94,521 in June 2022.

Notably, the supply-side indicator, the gross GST revenue collections grew 12 per cent YoY at Rs 1, 61,497 crore in June 2023 compared with Rs 1,44,616 crore in June 2022. "Going ahead, continued hand-holding by the government would help the economy to move ahead with great zeal and enthusiasm," said Dalmia.

Global economy: Weighing the elusive US recession

The US economy has managed to hold quite firm even as other major economies have started to show signs of some cracks. The Eurozone is in a technical recession (two consecutive quarters of sequential decline in seasonally adjusted GDP) while growth in China has been quite weak. Fears of recession in the US have sustained for quite a few months. However, most activity indicators continue to indicate decent strength.

For now, it appears that the historically proven drivers such as higher interest rates and persistently elevated inflation have had a limited impact on the US economy, according to the Kotak Mahindra Bank.

Rumki Majumdar, Economist, Deloitte India said that as the economies on the two sides of the Atlantic experience tighter labour markets and high inflation, cost-cutting measures by global MNCs will compel them to consider destinations like India where the global in-house centres (GICs) are quickly becoming an attractive proposition and increase the demand for services from India. 

"We are not only becoming an integral part of the value chain in global services delivery but with the participation of the GICs, we are also moving up the value chain," she added.

Comfortable external sector balance to keep the Indian rupee supported 

The bank said that current account pressures are likely to be lower in FY2024 relative to FY2023 amid lower global commodity prices narrowing the goods trade deficit and services trade surplus remaining steady. 

"We estimate FY2024 CAD/GDP at 1 per cent assuming an average crude oil price of USD 85/bbl (lower effective price due to Russia-led discount) with a BOP surplus of USD 12.2 bn factoring in the lower capital account (higher FPI flows offset by lower banking capital)," it mentioned. 

Much of the comfort in the external sector has been from the invisible side, which has offset a large part of the goods trade deficit lately. This induces a much higher tolerance for crude prices’ levels and bodes well for the Indian rupeee.

Besides, the relatively favourable growth and inflation differentials of India with its peers and major counterparts are expected to keep foreign investment flows robust in the near term. 

Meanwhile, the medium term may briefly be subject to significant risk-off weighing on the emerging market's forex reserves space as the global economic outlook becomes more clouded with uncertainties related to the recession/slowdown of key economies such as the US, Eurozone and China. 

"However, we expect the current RBI intervention strategy to continue, thereby keeping INR in a range. We expect USD-INR to trade in 81-83 and an average 82.7 in FY2024E," Kotak mentioned.