The Reserve Bank of India, which had earlier projected India’s real GDP to grow 6.5% in 2023-24, has recently raised its forecast to 7%.
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The story so far: Reeling from the aftershocks of the Ukraine-Russia conflict, such as elevated oil prices and high inflation, 2023 had begun on a sombre note with worries of an economic slowdown leading to a hard recessionary landing for advanced economies that would drag down growth in emerging economies like India’s too. As it turned out, the year was kinder than expected and the worst fears haven’t materialised yet, despite a fresh geopolitical flashpoint in West Asia and a few bank collapses in the West (remember Silicon Valley Bank or SVB, whose implosion compelled our own Shamrao Vithal Co-operative Bank to clarify all is well). While Indian stock markets ended the year at record highs, the economy has delivered positive surprises, with ₹1.6 lakh crore becoming the new normal for monthly GST collections and GDP growth hitting 7.7% between April and September on top of a 7.2% rise in 2022-23.
On the cusp of the new year, what are the key things to watch out for?
The Reserve Bank of India, which had earlier projected India’s real GDP to grow 6.5% in 2023-24, has recently raised its forecast to 7%. The Finance Ministry is more sanguine as of now, indicating an uptick of over 6.5% for the year ending March 31, 2024, in its review of the economy published this Friday. Global agencies have also rebooted their growth math for India. “Some of the key sectors of the economy — construction, manufacturing, financial and real estate services — are showing a robust growth and even the trade, hotels, transport sector which had remained below its pre-COVID level of 2019-20, has now fully recovered,” said noted economist and chief policy adviser at EY India, D.K. Srivastava. “The Indian economy has now left the COVID shadow well behind and negotiated the global headwinds that emerged due to the ongoing geopolitical conflicts well, with reliance on domestic growth impulses,” he reckoned. While the domestic growth engine is pulling along, risks to the growth and stability outlook mainly emanate from outside the country, the Finance Ministry noted. Slack global demand has been hurting goods exports through 2023, and IT-led services exports may feel greater heat in the coming year as developed economies continue to face challenges. While hopes of peaceful resolutions in conflict-riven zones remain slim, fresh disruptions like the attacks on shipping lines in the Red Sea corridors could pose greater challenges. Interest rate cuts by central banks will be watched closely.
What is expected on the policy and political economy front?
The first half of 2024 may see a lull of sorts, as the government gears up for the Lok Sabha elections. Finance Minister Nirmala Sitharaman, who will present an interim Budget on February 1, has indicated that there will be no spectacular announcements, just a vote-on-account to meet public spending needs till a new government is sworn in. But the last such exercise, before the 2019 polls, had included a rejig of income tax slabs and the unveiling of the PM-Kisan scheme that put cash in the hands of farmers. The full Budget for the year, likely in July, will see a larger armoury of policy tweaks at play. Most investors looking for governance and reform signals will have to wait till then, Ms. Sitharaman has said. Policy makers will keep a keen eye on whether private investment, which is beginning to rebound in sectors like steel, cement and auto, will become more broadbased and allow the government to step off the public capex pedal and focus on fiscal consolidation. While the battle for a majority in Parliament may not hinge on economic issues alone, the poll outcomes will influence the trajectory of policy making. And this holds true not just for India. “Politics may also create turbulence and uncertainty, as there are 40 upcoming national elections representing 41% of the global population in 2024 alone. Russia, India, the European Union and, the United States, will hold elections that will likely re-shape the path of global affairs in the second half of the decade,” noted Avinash Satwalekar, president of Franklin Templeton Asset Management India. Global voters’ mood amid an increasing shift to inward-looking, protectionist polity in many countries, could thus, impact trade deals and the broader direction of global economic engagement.
Are there higher hopes of rate cuts occurring in 2024?
While most expect the Reserve Bank of India to start interest rate cuts in the second half of the year, the US Federal Reserve’s indication of a pivot from its rate hike cycle has prompted hopes of many other central banks following its cue. A Bank of America report earlier this month said there will be 152 rate cuts next year from central banks around the world. If they materialise, demand for Indian goods and services may yet get a bump-up in 2024. In the Indian context, industry and consumers also eagerly await changes on two more rates – prices of petrol and diesel that have been frozen since mid-2022 (despite global oil prices declining steeply in recent months), and the unwieldy multiple GST rates’ framework. Prime Minister Narendra Modi, during the recent Assembly polls’ campaign, hinted at a review of petroleum products’ retail prices. Perhaps, some relief may be rung in before the Lok Sabha battle. The GST rate rationalisation exercise, on the other hand, may only gather steam after the elections, but could figure as a prominent poll promise.
Is inflation, and its impact on consumption, no longer a worry?
Despite intermittent spurts, India’s inflation trajectory seems to be under better control than a year ago. The RBI expects retail inflation to average 5.2% in the first half of 2024 before easing to its 4% target between July-September and rising to 4.7% in the final quarter. However, as the Governor has asserted, food prices remain a concern. With Kharif crop estimates not rosy and El Niño effects hurting Rabi sowing, the supply of several food items, including pulses, could remain under pressure and keep eating into household budgets. Weaker farm sector performance would also constrain rural demand and feed into a trend of uneven consumption demand – with high-end goods and services booming while low-price segments lag. Recent curbs on retail loans and weak hiring trends in sectors like IT services could also hurt urban demand. Without a broader consumption boost, private capex is likely to be limited to some sectors, which may not suffice to kickstart the virtuous investment cycle necessary to create more and better jobs that can drive up spending capacity and factory utilisation rates.