While the Economic Survey’s baseline growth forecast of 6.5% for FY24 is very optimistic, the survey tempers the outlook saying growth could come in anywhere between 6% and 6.8%, depending on global economic and political developments. There is no doubt that weaker global growth and trade will weigh on India’s gross domestic product (GDP), as is evident from a sharp deceleration in merchandise exports. In this context, one would have expected the International Monetary Fund (IMF) to raise its FY24 India growth forecast from 6.1% as the US is now expected to do significantly better than what was anticipated a few months back. That IMF hasn’t done so, despite the US being one of India’s biggest export markets, is worrying. While weaker exports will no doubt pull down growth, local consumption and investments too might turn out to be a bit of a drag.
Consumption held up reasonably well in the first half of FY23 but has seen a fairly sharp tapering off post the festive season. Economists attribute this to a slowdown in new hiring, the waning of pent up demand, high inflation sapping disposable incomes, and an increase in mortgage payments. The Survey is spot on when it talks of real estate sales booming, but that too is now decelerating. In particular, the demand for services in urban India has been slowing. With interest rates likely to remain elevated, purchasing power would be crimped. Also, a fair bit of consumption appears to have been supported by savings rather than incomes, resulting in a depletion of household savings. Household liabilities too are rising. To that extent, the Survey’s belief that “the consumption rebound may have lasting power,” and that it has “sufficiently matured” might not play out.
Again, while we are seeing signs of a capex revival in the private sector, the numbers are small and it is not broad-based. There is no doubt, as the Survey points out, that the balance sheets of both banks and companies are strong. But there seems to an under-estimation of the extent to which recessionary conditions overseas can impact private capex. In fact, the Survey also acknowledges that private capex typically suffers during phases of global slowdowns and heightened economic uncertainty; it also flags the risks of ‘entrenched inflation’. Already the combination of slowing demand and rising costs are pressuring corporate cash flows. In contrast to the assertion that states “are also performing well with their capex plans”, data shows that the combined capex of 18 states was up just 7.5% y-o-y in the April-November period. Again, while the Survey points to evidence of rising announced projects, not all of these are taking off.
The capex cycle may be turning, but it is doing so at a very slow pace. Unless fixed capital formation picks up pace, not enough jobs would be created especially at the lower end of the pyramid. India’s capex multiplier of four can aid rapid output growth but expectations of a quick recovery need to be tempered. To be sure, the medium term outlook for India is encouraging given the large local market, the robust public digital platform and the government’s initiatives in logistics and infrastructure. It is possible the potential growth can be lifted to well beyond 7%. But in the meantime, the government would do well to heed the advice of “fiscal discipline turning into fiscal stimulus” by lowering the cost of borrowings, and keep an eye on next year’s current account deficit.