Why aren't Indian markets enthused about FY24 GDP growth forecast of 6.4%-6.5%?

Reserve Bank of India Governor Shaktikanta Das on Wednesday announced India's GDP growth forecast for 2023-24 at 6.4 per cent. The Economic Survey 2023, presented by Finance Minister Nirmala Sitharaman, projected a GDP of 6 per cent-6.8 per cent in 2023-24. Union Budget 2023, too, took 6.5 per cent GDP number for nominal growth purposes.  

The market, however, is not too optimistic about the growth number. Dharmakirti Joshi, Chief Economist, CRISIL Ltd said that the agency expects the GDP to be 6 per cent in the next fiscal. Axis Mutual Fund, IDFC AMC and HDFC Bank have also pegged the GDP at around 6 per cent. HDFC Bank has gone a step forward. "We see a high chance of this forecast being revised down going forward. We expect GDP growth at 5.8 per cent-6 per cent in FY24," said the private lender.

Why is there a near consensus in market for lower FY24 growth?

The first reason could be the government’s preference for capital expenditure rather than revenue expenditure. There is a massive hike of over 37 per cent in the capital expenditure at Rs 10 lakh crore next year. The fruits of higher capital expenditure will come over the medium- to long-term. Whereas the revenue expenditure reflects the government consumption in the first year itself. In fact, there is a cut in subsidies and schemes like MNREGA that have lower allocation under the revenue expenditure.

Second, the full impact of the 250 basis point repo rate hike will be reflected in the market next year. So far, the banks have transmitted 137 basis points to new borrowers and 213 basis points to depositors. If one looks at the 137 basis point transmission of rates to borrowers, it is actually 54 per cent. Therefore, the next half of rate hikes will get fully passed on during 2023-24. This will have some impact on the credit demand both from retail as well as corporate.

Third, the retail inflation, or the consumer price index (CPI) inflation, will remain elevated next year. The RBI’s projection of retail inflation at 5.3 per cent in 2023-24 shows that the RBI's target of 4 per cent is still far away. Higher inflation in the last one year is already eating away the disposable income of households.

Fourth, the monetary tightening in the global financial markets is also expected to have a spillover impact. When the global rates were low, the corporate sector was borrowing funds at a cheaper rate and the global private equity and venture capital money was also flowing into startups and new sunrise sectors. But now money is coming at a higher cost and the global players are also cautious about investing money.

Last, but not the least, the rising current account deficit (CAD) is a worry for India as exports have already weakened due to global slowdown, and imports continue to rise. In the past, the robust capital flows, both from the FDI and FPI, into equity markets have helped in financing the CAD, but now there is a challenge to attract higher global flows. This could have a negative impact on the rupee value against the US dollar and hence, a threat of imported inflation.