India’s government predicted the economy will expand 7.3% in the fiscal year ending March 2024, exceeding expectations as improving consumption and investment help cement the country’s place among the world’s fastest-growing major economies.
Upward Revision From 6.5% Estimate
The new forecast marks an upgrade from the government’s 6.5% estimate in July 2022 and is higher than the 7% pace projected by the central bank. The data will likely boost the prospects of Prime Minister Narendra Modi’s Bharatiya Janata Party as it gears up for national elections expected in the summer of 2024.
A rebound in private consumption, which makes up nearly 55% of GDP, and higher capital formation will support domestic demand – the main driver of economic activity, according to a statement from the Statistics Ministry on Friday. The government and central bank have taken several steps in recent months to spur investment and create jobs in the run up to the general election.
“The January-March quarter will probably record an even faster pace as the boost from domestic and external tailwinds is likely to be stronger,” said Indranil Pan, chief economist at Yes Bank Ltd.
Comparison With Global Peers
The forecast keeps India ahead of all peers and cements its position as the engine supporting global growth amid weaknesses in major economies like the U.S. and China. India is projected to contribute a fifth of the incremental global output over the next decade, according to Morgan Stanley.
The services sector will expand 8.5% in the year ending March, while agriculture growth is seen at 3.5% and manufacturing at 1%. The International Monetary Fund last month said India will retain its tag as the fastest growing major global economy despite concerns over wider effects of tightening interest rates and financial conditions.
Impact on Financial Markets
Indian markets welcomed the GDP growth estimates, with stocks jumping on expectations of robust corporate earnings growth in 2023. The benchmark S&P BSE Sensex closed 2.3% higher after rising as much as 2.6% earlier on Friday, while the rupee ended little changed against the dollar.
“Equity markets are taking cues from the strong GDP growth estimates,” said Gaurav Dua, head of capital market strategy at Sharekhan BNP Paribas. “Given growth visibility and expected peak in policy rates, markets may focus more on earnings growth potential now.”
The GDP expansion, topping China’s anticipated 4.4% growth this year, bodes well for investors during a turbulent time in global markets. Foreign portfolio investors have turned net buyers of Indian equities after months of sales amid expectations the economy will remain resilient.
Factors Supporting Growth
Several high-frequency indicators show India’s economy remains robust compared to world peers. Purchasing managers indexes signaled further expansion in manufacturing and services last month, automobile sales continue to rise on improving income from sectors like information technology, while the dominant services index stands at a six-month high.
With inflation expected to cool further over the coming months, that should bolster purchasing power and confidence. Businesses are also rebuilding inventories after a long period of cautious approach that should additionally support momentum.
“The continued traction in the economy is evident from the pickup seen across a wide set of high frequency data releases,” said Sakshi Gupta, principal economist at HDFC Bank Ltd. “We expect GDP growth for FY24 to be 6.8-7%.”
Much will depend however on how much additional support emerges from the federal budget due February 1. While Finance Minister Nirmala Sitharaman reiterated her commitment to narrowing the budget gap, analysts broadly expect some spending giveaways ahead of the elections.
Government Spending Support
Government spending, budgeted to rise 9.9% this fiscal year, will continue to support growth next year as well. New projects include dedicated freight corridors along major rail lines and an expansion of India’s road network. Defence capital expenditure is also budgeted to rise 13% in the year starting April.
Consumer spending, accounting for nearly 60% of GDP, remains the backbone of the economy and sustained urban demand — boosted by a strong services sector — has compensated for sluggishness in some rural areas. A widening gap between urban and rural demand was reflected in trends for fast moving consumer goods, vehicle sales and energy products consumption.
A solid capital spending cycle, while raising risks for the banking sector from potential souring loans in future, augurs well for near-term growth. Credit growth has picked up after languishing at multi-year lows until recently, indicating a private investment cycle may finally be starting.
|Key Growth Indicators
Global Headwinds Remain
Risks to the growth outlook remain tilted to the downside despite the higher projection. The International Monetary Fund, World Bank and other forecasters have warned growth across Asia will slow more than previously expected as higher interest rates hit trade and investment worldwide.
The challenges for India include managing inflation expectations and keeping fiscal spending focused on investment over consumption. Price pressures have shown a declining trend after prompting the central bank to raise interest rates by 225 basis points last year to tame demand. But risks remain from potential disruptions due to extreme weather events.
While the government stuck to its target for a budget deficit equivalent to 6.4% of gross domestic product for the year ending March, analysts see limited room for any massive increase in subsidy spending next fiscal year. JP Morgan Chase sees a fiscal deficit target between 5.8% and 6% of GDP for 2024-25.
The budget “is not likely to be overtly populist,” analysts including Sajjid Chinoy wrote in a note Thursday. “Some spending momentum should continue, but with an eye on elongated consolidation.”
Outlook for 2024
The higher GDP estimate reinforces expectations that the recovery is finding a stronger footing and while the January-March quarter growth may be even higher, the momentum is expected to stabilize rather than accelerate sharply in the next fiscal year.
The resilience has been anchored by domestic demand, buffering India from the full impact of global forces sweeping through emerging markets. The IMF expects India will grow 6.1% next year, while the World Bank sees a 6% expansion. The Reserve Bank of India forecasts GDP growth for 2024-25 at 6.4%.
Services activity should remain healthy while the biggest risks to the outlook come from the external sector via weaker export demand and wider trade deficits. Slowing global growth may dampen overseas appetite for software services and outsourcing from India.
“The numbers endorse our expectation that India will remain the fastest-growing major economy in the world,” said Sujan Hajra, chief economist and executive director at Anand Rathi Securities. “One negative surprise has come from the manufacturing sector with almost no expected reversal visible next year.”
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