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Optimism On Indian Economy Improving, Says Acuité Ratings But Geopolitics A Global Red Flag

India vs world: Optimism on Indian economy improving, says Acuité Ratings but geopolitics a global red flag
“There is a significant likelihood that the GDP growth for India will average between 6.5- 7.0 per cent over the next 3 years,” said Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research.

Written by Tanya Krishna
March 6, 2024 16:48 IST
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The optimism on the domestic economy seems to be improving by the month, said Acuité Ratings & Research in a report.

With NSO revising its GDP growth estimate to 7.6 per cent for FY24 and pegging Q3 growth at 8.4 per cent, RBI’s economic growth forecast at 7.0 per cent in FY25, headline inflation subsiding to around 5.0 per cent, core inflation dropping below 4.0 per cent, the optimism on the domestic economy seems to be improving by the month, said Acuité Ratings & Research in a report. Although GVA growth remained at 6.5 per cent in the previous quarter, GDP growth has been sharply higher due to higher tax collections net of subsidies.

“RBI has forecast a growth of 7.0 per cent for the Indian economy in FY25. There is an expectation of higher economic reforms after the national elections with a high possibility of the current government reinstated to power. Private capital expenditure seems to have started jogging after a long and slow walk. States seem to be competing with each other to attract large private sector investments. There is a significant likelihood that the GDP growth for India will average between 6.5- 7.0 per cent over the next 3 years,” said Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research.

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GDP data indicated that investment growth continued to outpace consumption growth by a huge margin and the public investments led to robust growth in core sectors such as steel, cement and power. Headline retail inflation too has subsided to around 5.0 per cent despite the pressures on food inflation induced by the El Nino phenomenon; core inflation has dropped well below 4.0 per cent and wholesale inflation is nominal.

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The report further stated that capital flows are set to improve given the growth momentum in the economy, India’s inclusion in global bond indices and the impending rate cuts by Feds and other large central banks. India’s financial sector remains healthy with a strong regulatory oversight, it said.

Suman Chowdhury added, “As a rating agency, we are trained to be mindful of the downside risks and not ignore them. While urban demand for goods and services have been strong, there is still a fragility in rural demand. Despite the robust GDP figures, the private consumption growth has been sluggish at 3.5 per cent in Q3FY24 and remains an area of concern.
Hopefully, we will see an improvement in rural demand after the current rabi season. Higher interest rates (with a lower prospect of a rate cut in the next few quarters) and the increased focus on fiscal consolidation may slow down the growth momentum to some extent. The spectre of an escalation of geo-political risks seems to be hanging over us anyway. So, as they say, let us be “cautiously optimistic”.”

A closer look at the Indian economy…

Resilient growth momentum in early 2024

Some of the domestic lead indicators started in 2024 on a strong note. PMI manufacturing too strengthened to a 4-month high, driven by a sharp uptick in new orders and improved further in Feb-24. PMI services index rose to a 6-month high in Jan-24 at 61.8 led by expansion in new business although some correction was seen in Feb-24. Auto sales too remained resilient in Jan-24 and Feb-24, with growth in two-wheeler sales clocking a double-digit growth, which is the best run in the post COVID phase.

In terms of consumption, while urban consumption has held up well so far in FY24, impact of lagged monetary policy tightening as well as regulatory measures to curb the pace of unsecured lending, are expected to weigh on the pace of urban consumption in FY25, said the report by Acuité Ratings & Research. In contrast, rural consumption could continue to recover aided by rise in agriculture wages, upward adjustment in MSPs, moderation in retail inflation along with indirect measures of income support such as reduction in LPG cylinder price and extension of free foodgrain program.

Private capex waiting in the wings: Despite healthier corporate balance sheets and comfort from global commodity cycle, private capex recovery continues to wait in the wings; expected to pick-up more materially post general elections in FY25, the report stated. “New investments continued to remain lackadaisical in the quarter ending Dec-23, as per CMIE data at Rs 2.1 tn compared to Rs 1.9 tn in the previous quarter. Historically, we do find evidence of new investments remaining sluggish in 2-3 quarters prior to general elections,” said Suman Chowdhury.

NSO upgrades FY24 growth to 7.6%, RBI at 7.0% for FY25: NSO has upgraded the growth estimates for FY24 and Q3FY24 at 7.6 per cent and 8.4 per cent respectively after significant adjustments to the past data. RBI in its Feb-24 monetary policy, pegged FY25 GDP growth estimate at 7.0 per cent. Market expectations are however placed lower, premised on normalization in demand for services and waning of support of price deflator to manufacturing sector in FY25. Growth as per RBI estimates, is expected to remain in a tight range of 40 bps in FY25, between 6.8- 7.2 per cent in FY25 NSO.

India’s CPI inflation moderated to a 3-month low of 5.10 per cent YoY in Jan-24 vis-à-vis 5.69 per cent in Dec-23. With favorable winter seasonality exerting its influence, food inflation has started showing initial signs of softening despite few lingering concerns. “We have revised our FY24 average CPI inflation down to 5.4 per cent. RBI has pegged FY25 CPI inflation forecast at 4.5 per cent. The upside risks to be watchful about, per the Acuité Ratings report, are, impact of Israel-Hamas tensions, tensions in Red Sea, impact of El Nino on global food production in the coming months, durability of price pressures seen in cereals, and pulses, despite administrative measures, and 2024 Southwest monsoon.

Crude oil price, meanwhile, has remained largely comforting, despite tensions in the Red Sea region. In its latest update, IEA expects global oil demand to lose momentum, prompting the agency to trim its 2024 growth forecast to 1.22 mbpd from 1.24 mbpd earlier.

After a strong run, the pace of direct tax collection is expected to moderate in Q4FY24. In contrast, indirect tax collection is budgeted for a moderate improvement in Q4 FY24. “Capex disbursal until the end of Q3FY24 has grown at a robust pace. Given the pruning of the full year capex budget, the momentum could see a let up in Q4FY24,” it said.

Rates Outlook: Acuité Ratings & Research said, “We expect RBI to moderate core liquidity surplus from Rs 2.1 tn (1.0 per cent of NDTL) in end Q3 FY24 to Rs 1.6 tn (0.8 per cent of NDTL) by end Q4 FY24 to boost monetary policy transmission.”

A look at the global economy…

Global growth forecast improves, but clouded by ongoing geopolitical tensions

IMF, in its Jan-24 update to World Economic Outlook, upgraded 2024 global growth forecast by 20 bps to 3.1 per cent – to match 2023’s pace of expansion. Amidst stronger than anticipated strength in the US economy along with some other EMDEs, as well as fiscal support in China, the risk of a global hard landing in 2024 has receded materially.

Having said so, continued attacks in the Red Sea and the ongoing war in Ukraine risk generating fresh adverse supply shocks to the global recovery, with spikes in food, energy, and transportation costs (IMF, World Economic Outlook). Global PMI surveys indicate a lengthening of delivery times already in Jan-24, especially for Eurozone economies, stated the report.

With recent economic data from the US, the consensus expectation of an early pivot has been pushed back. Currently, market participants expect the Fed to pivot in May/Jun 2024 with cumulative rate cut expectation of 75-100 bps for CY24, down from 125-150 bps that stood towards the end of CY23.

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In Jan-24, global manufacturing PMI rose above the threshold of 50 for the first time since Aug-22. Most economies indicated an improvement, driven by the ‘new orders’ and ‘production’ components, including Canada, US, Greece, Italy, Netherlands, Spain, India and Brazil. Having said so, both the UK and Japan slumped into a recession, at the end of 2023. The improvement in Jan-24 PMI was despite escalation of tensions in the Red Sea region, which has lengthened delivery timelines for sectors such as Food and Construction materials.

CPI in the US rose more than expected in Jan-24, coming in at 3.1 per cent (vs. 2.9 per cent projected). Excluding volatile food and energy prices, core CPI accelerated 0.4 per cent in Jan-24 and was up 3.9 per cent YoY, unchanged from Dec-24 vs. forecast of 0.3 per cent and 3.7 per cent, respectively. Post the higher-than-expected CPI and NFP data, markets have rolled over rate cut expectations to May/Jun-24