By Rajani Sinha
The new fiscal year has started with renewed global turbulence. Slowing growth in major economies, still high inflation and tightening of financial conditions have made the global landscape volatile, even while the recent bank collapses in the US and EU have heightened the risk of financial instability. To further complicate matters, the recent production cut announced by OPEC and the consequent spike in global crude oil prices has aggravated inflationary threats.
In the midst of all this global turmoil, India is in a relatively sweet spot. While India’s GDP growth is expected to moderate from an estimated 7% in FY23, it would still be at around 6.1% in FY24. CPI inflation is also likely to moderate supported by the base effect. The corporate and bank balance sheets are in good shape, indicative of the relative resilience of the economy to any contagion risks. While exports are slowing, likely moderation in the current account deficit and ample forex reserves implies lesser external sector vulnerability for India. While these data points do paint a rosy picture for the Indian economy in FY24, there are challenges galore and we need to remain vigilant.
Consumption, the main pillar of India’s economy, has been showing a lopsided recovery post the pandemic. While the urban demand has been strong, rural demand has been lagging. Similarly, while the high-income category has been showing strong pent-up demand for luxury items, the low and middle-income categories have been cautious of their spending on discretionary items. However, recent RBI household survey data shows improvement in spending by the households on discretionary items. Rural demand is also showing signs of improvement as highlighted by the improving IIP consumer non-durables data. However, the verdict is still not very clear, with some indicators of rural demand like two-wheeler sales remaining weak, while others like tractor sales showing improvement. Going forward, it will be critical to watch out for broad-based recovery in consumption demand.
Inflation in the economy is likely to moderate and that should be supportive of a pick-up in consumption demand. However, average CPI inflation for FY24 is projected at 5.1%, still higher than RBI’s target of 4%. Core inflation, which is found to be sticky, is also likely to average above 5.5% in FY24. Moreover, there is a risk of global crude oil prices spiking or food inflation flaring up, given the heightened risk of El Nino.
Investment, the other critical pillar of India’s economy, has also been somewhat lopsided. The government is trying to use the investment to invigorate the economy as reflected by the strong budgeted capex growth of 37% for FY24 on the back of already high capex in FY23. Unfortunately, the private sector so far has been slow with its capex plans. Even while the manufacturing sector’s capacity utilization has increased to around 74 level (close to the long period average), the private sector has been cautious due to the uncertain economic environment and tight financial conditions. The good point is that the New Investment Project announced data (CMIE) shows increasing intent of the private sector to invest. New Investment Project announced has increased by 36% (YoY) in Q4 FY23, with the private sector share at a high of 92%.
The external sector is already feeling the pinch of economic slowdown, with exports slowing down. Overall merchandise exports are likely to contract by 5% in FY24 as against the estimated growth of 3.5% in FY23. However, strong services sector export growth will cushion the fall in merchandise exports. The CAD to GDP ratio is likely to moderate to 1.6% in FY24 from an estimated 2.1% in FY23. However, the capital inflows would remain volatile in midst of an uncertain global environment.
To conclude, while India is in a relatively better position, there is a need to remain overly cautious in this precarious environment. The RBI has also exercised caution by not hiking the policy rate in the midst of looming economic uncertainties. At the same time, we should use our favourable macroeconomic parameters to ensure broad-based recovery as only then will the growth be sustainable. India should also use its current favourable position to strengthen its foothold in the global arena. Recovering from the pandemic, the global economy is increasingly looking at diversification/friend-shoring and India needs to gear up to capitalize on this opportunity.
(Rajani Sinha is Chief Economist at CareEdge Ratings. Views expressed are author’s own.)
