This is India’s decade. Bullish about the country’s growth potential, a flurry of recent reports have said so; some have even called it India’s century. While the India growth story may be strong in the long term, the near-term picture is not so sunny. There are rising concerns about how well India can ride the brewing global storm as well as emerging domestic challenges like a weak monsoon that could further fuel inflationary pressures and hit consumption demand. The upcoming general elections in 2024 could also impact the capital expenditure (capex) plans of the government that are currently on in full swing.
Let’s talk numbers. The economy expanded at a four-quarter high of 7.8 per cent in the April-June 2023 quarter, boosted by the services sector and strong domestic demand. Gross value added (GVA) in the services sector expanded by 10 per cent in Q1FY24, aided by double-digit growth of 12.2 per cent in financial, real estate and professional services, and 9.2 per cent expansion in trade, hotels, transport and communications. Industry GVA remained flat at 4.7 per cent while farm sector growth moderated to 3.5 per cent in Q1FY24.
Chief Economic Adviser V. Anantha Nageswaran is confident that the economy will grow 6.5 per cent in FY24 and expects that the 7.2 per cent GDP growth estimate for FY23 will be revised upwards. Going forward, real GDP growth is estimated at 6.5 per cent for the next 7-10 years, he says. “The scope for upside to this number is probably higher than the scope for downside,” he says, adding that further reforms such as ensuring energy security, power sector reforms or addressing the skilling and education challenges have the potential to boost growth further. (For his full interview, turn to page 54)
Finance Secretary T.V. Somanathan says growth will be around 6 per cent due to strong domestic demand and capex. “India’s domestic demand is going to be strong, and therefore, I think we will be close to our expected growth targets. I would not like to pick an exact number, but [it will be] in the range of 6 per cent,” he tells BT.
However, despite an upward revision by some agencies in their GDP estimates, most remain lower than the official forecast. Morgan Stanley has pegged GDP growth at 6.4 per cent in FY24 from its previous 6.2 per cent, while Nomura has raised it to 5.9 per cent from 5.5 per cent. But all agree that economic growth may have hit a peak in the first quarter and is set to slow down in the coming months. The Reserve Bank of India has projected a sequential slowdown from 8 per cent in Q1 to 6.5 per cent in Q2, 6 per cent in Q3 and 5.7 per cent in Q4.
D.K. Srivastava, Chief Policy Advisor at EY India and a member of the Fourteenth Finance Commission, notes that the 7.8 per cent growth is slightly lower than the RBI’s estimate and it will have to catch up in the next quarters to match the 6.5 per cent full fiscal target. “Our estimate is 6.2-6.3 per cent for the fiscal year. PMI is doing well. Manufacturing and services are gaining traction. The only challenge is the contraction in exports,” he says. The low nominal GDP growth of about 8 per cent and subdued tax buoyancy of less than one in the first three months of the fiscal are a concern. “The Centre may have to either increase its fiscal deficit or cut capital expenditure which would pull down growth to less than 6 per cent,” he warns.
Economists agree that the positives for the economy include low core inflation, sustained domestic demand as well as the focus on capital expenditure by the government and a recovery in private investments. However, negatives abound as well. While slowing demand for exports has already been a problem since the second half of last year, elevated food inflation as well as a weak monsoon in August are raising concerns about the increase in food prices and dampening rural demand. Sunil Sinha, Senior Director and Principal Economist at India Ratings and Research, sums it up. “Global crude and commodity prices have eased, which has proved to be a benefit for India, which is a net importer. However, Europe and the US—the two largest export markets for India—are still impacted by the war, which is problematic for our exports,” he says. What will determine the trajectory of the economy in the coming months? Let us find out.
The Exports Challenge
According to the GDP data for Q1FY24, exports contracted by 7.74 per cent in April-June 2023 against an 11.9 per cent expansion in the previous quarter amidst weak growth in the US, Europe and China. Merchandise exports have been shrinking in recent months while growth in services exports has also slowed. Goods exports in July fell to a nine-month low of $32.25 billion, a decline of nearly 16 per cent year-on-year (YoY).
While the government is hopeful that total exports would be higher than the $776 billion in FY23, it may be difficult as global growth is slowing after a robust first quarter. The United Nations Conference on Trade and Development (UNCTAD) revised its nowcast (a data- and model-based projection of global trade) of merchandise trade volume downwards with world trade growth seen at 0.47 per cent in the third quarter of CY2023, as against 0.19 per cent in the second quarter.
Somanathan notes that there is a definite negative trend in growth in some of the developed economies. “The environment for exports is going to be difficult this fiscal year. Exports as an engine of growth this year probably will not be very strong,” he says.
However, Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations, believes that the worst is over for Indian exports as most developed economies have fared better than expected. “The contraction in exports will be arrested in August to some extent. We are keeping our fingers crossed on how quickly we will retain the markets. While there will be growth in exports in terms of volume, the growth in value terms may take time,” he says.
Capital Expenditure Boost
Gross fixed capital formation, which is an indicator of investments, grew by 8 per cent YoY in Q1FY24. Though it was slightly lower than the 8.9 per cent growth seen in Q4FY23, economists note that it has maintained its share in the GDP at 29.3 per cent, which is a promising sign.
The government has prioritised capital expenditure since the last fiscal as a means to revive and sustain economic growth and has outlined an ambitious Rs 10 lakh crore plan for FY24. By July-end, the Centre’s capex had risen to nearly a third of the target at Rs 3.17 lakh crore, but this could possibly taper off ahead of the 2024 elections.
Somanathan says that sustained capital expenditure by the central government and to some extent by the states, as well as the overall improvement in sentiment in the private sector, is an advantage. “Government capex has picked up as intended in the Budget and departments have, in fact, accelerated their capital expenditure. Even in the states, there has been an encouraging uptick in capital expenditures so far this financial year,” he says, adding that there are incipient signs of investment intentions in the private sector as well.
An article in the RBI’s August bulletin highlights that the investment cycle appears to be poised to gain momentum going ahead, but its sustainability needs to be watched closely. “The government’s thrust on capex, besides various policy initiatives to revive the investment cycle, and improved economic outlook provided a conducive environment for the private corporates to undertake fresh capital investment,” it notes, though the views are of the authors. (See Chart Robust Numbers.)
But questions over its sustainability remain as anecdotal evidence suggests companies tend to remain in ‘wait and watch’ mode for the Lok Sabha elections next year. Measures to attract investments such as production-linked incentives have seen mixed success. The scheme for 14 sectors, with an outlay of Rs 1.97 lakh crore, has seen investments of over Rs 78,000 crore although it is being reviewed for some sectors.
The Impact of the Monsoon
An unexpected source of trouble has been the weak monsoon, with August proving to be the driest ever. All-India rainfall has turned deficient at 36 per cent below long period average (LPA) as on August 31, although there is expectation of some revival in September. Economists warn that this could impact kharif crop prices and lead to inflationary pressures in cereals and pulses. “Overall monsoon is expected to remain below normal, under pressure from El Niño. This could hit kharif production. Rabi crop could also be hit if groundwater levels are not replenished adequately,” says a note by rating agency CRISIL, adding that food is the biggest risk to inflation, given the weak monsoon. “Rural demand will particularly face the brunt from the hit to incomes from low crop output and high inflation,” it adds.
The government has already taken some pre-emptive measures such as restricting wheat, rice and onion exports. Food inflation, due to a surge in prices of perishables such as tomatoes, has become a problem after rising to a 15-month high of 7.44 per cent in July, although it eased to 6.83 per cent in August as prices of vegetables moderated. It is seen to be sticky in the coming months as well. For now, the silver lining is that core inflation has remained contained and is likely to stay so.
Tracking Consumption Demand
Private consumption, with a 6 per cent growth in Q1FY24, helped boost GDP growth. But concerns persist that consumption demand is yet to fully recover. Sinha of India Ratings notes that while there is a YoY growth in private final consumption expenditure and urban demand seems to have revived, the picture is not as rosy as it seems. “A deeper analysis reveals that the post-Covid-19 recovery in demand is skewed. People with stable incomes have not seen an impact on their spending capacity. But the lower 50 per cent of the consumption bracket remains severely impacted because either they have not been able to get jobs or their wages have fallen,” he notes.
The government is, however, doing its best to ensure consumption demand, says the Finance Secretary, while disagreeing with the view that consumption is yet to fully recover. “We are doing a lot of capital investment that creates a lot of jobs, and particularly the construction sector is very labour intensive. We have sustained all of our social programmes. So government expenditure is doing its bit in terms of consumption,” Somanathan says, adding that different welfare programmes such as the Pradhan Mantri Gram Sadak Yojana and Pradhan Mantri Awas Yojana are pumping resources into the economy.
How each of these factors plays out in the coming months will be crucial to the performance of the Indian economy this fiscal, and more importantly, whether it manages to post a full recovery in the next financial year. Significant reforms may be unlikely for now because of the upcoming general elections, but sustaining the pace of capital expenditure and nurturing the revival in investment sentiment could make a huge difference.
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