Expert View | India's FY24 GDP growth to hit 8%; Infra investments to exceed consumption in FY25: DBS Bank's Radhika Rao

India's gross domestic product (GDP) for the January-March quarter of fiscal 2023-24 (Q4FY24) and the full year (FY24) will be released on Friday, May 31. The macroeconomic data will come only days ahead of the high-stakes Lok Sabha election results 2024, due on Tuesday, June 4. 

The Indian economy has shown robust growth, particularly in the previous two quarters, amid an actively disinflationary monetary policy stance by the Reserve Bank of India (RBI) - aimed at supporting economic growth. 

The central bank's monetary policy committee (MPC) kept the benchmark repo rate steady at 6.5 per cent for the seventh consecutive meeting on April 5 and decided to remain focused on thewithdrawal of accommodation. The RBI's rate-setting panel believes the strong growth momentum gives policy space to focus on durable price stability.

In the previous October-December quarter (Q3FY24), the economy grew at its fastest pace in six quarters at 8.4 per cent - remaining the fastest-growing major economy in the world. In the current economic scenario, the International Monetary Fund (IMF) raised India's GDP growth projection by 30 basis points to 6.8 per cent in FY24 citing buoyant domestic demand.

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Meanwhile, several brokerage reports and analysts are predicting that India's GDP growth in FY24 likely rose above 7.5 per cent and may hit eight per cent on strong base fundamentals. Radhika Rao, Senior Economist and Executive Director of leading multinational DBS Bank in an interview to Mint's Nikita Prasad, said that India's GDP growth in Q4FY24 will come above seven per cent.

The infrastructure spending growth rate will outpace consumption in FY25 for the fourth consecutive year, according to the economist. Rao added that the government's priority will be the full Budget in July, which may follow the contours of the Interim Budget. Here's what the lead economist expects from the upcoming GDP data and her projections for the Indian economy in the near term:

Edited excerpts from the interview:
 

1.Reports suggest that India's FY24 GDP growth is likely to exceed government estimates and may reach 7.8-8 per cent. What is your estimate of the Q4 and FY24 GDP growth figures? 

Rural demand continued to catch up in the final quarter of 4QFY24 (1Q24), as signalled by the pickup in FMCG volume sales, two-wheeler sales and lower unemployment rate, whilst demand for MNREGA tapered off due to the start of the rabi harvesting period towards the end of the quarter. 

We peg our real GDP growth forecast at seven per cent yoy, taking the full year FY24 growth closer towards eight per cent. Our GDP Nowcast model that taps statistically important variables to provide a forward-looking assessment pegs growth in 1Q24 and 2Q24 (4QFY24 and 1QFY25) at about average of seven per cent.
 

2.In the upcoming GDP data, which sectors will likely be the high-growth drivers and which ones are expected to contribute to a slowdown?

Based on the IIP trends in 1Q24, sectors like basic metals, transport equipment, pharma, petroleum, and chemicals are back to pre-pandemic levels. Large scale electronics, especially telecom instruments meanwhile, continues to benefit from improving production trends and indigenisation of the value chain players.

Business sentiments held up, captured by optimism on production and capacity utilisation, accompanied by a record high in e-way bills and double-digit jump in toll collections in March. General government capital spending picked pace ahead of the elections, while the infrastructure industry index moderated towards the end of the period, including steel production. 

Corporate India registered a notable increase in revenue growth in 4Q, largely led by BFSIs and automakers, outside of which net profit slowed. On the external trade end, total exports (goods and service) rose by a faster pace than imports, helping to nearly halve the trade deficit and effectively lowering the drag on headline growth.

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3.Leading global organizations like IMF have noted that India's strong capex is a major reason behind its robust GDP growth. Do you anticipate any impact on India's infrastructure spending and capex cycle when the new government takes office after the election results on June 4?

The focus on infrastructure and developmental spending are likely to continue, with FY25 on course to mark the fourth consecutive year when the rate of investment growth outpaces consumption, revisiting the streak last witnessed in 2004-2008. As it stands, capex allocations had been priortised with an emphasis on railways, roads and highways, defense and transfer to states back in the interim Budget. 

Outside of the election timeline, higher multiplier effect of capex (2x) compared to revenue spend will be beneficial for growth. Additionally, states’ capital expenditure has also grown by an average of 27 per cent yoy in the past three years, which will get a hand from concessionary financing support from the centre. In recent quarters, apart from public entities, residential construction has also picked up, providing a backstop to non-corporate private capex. 

The inventory of completed homes is low. Add to this, the backdrop for private sector corporate capex to rise – on deleveraged players, healthier bank balance sheets and strong structural push (lower taxes, PLI schemes etc.) remains strong. Key risk on this front is a deterioration in the global growth outlook and/ consistent moderation in domestic consumption.
 

4.On the macroeconomic front, what will be the new government's immediate priority after coming to power?

The immediate priority for the incoming government will be the full Budget which could be tabled in July. This Budget is expected to follow the contours of the interim edition tabled in February 24, and deliver on fiscal compression, continued emphasis on capex and refraining from outright populism. 

The FY25 deficit target had been set a narrower -5.1 per cent of GDP, narrower than market expectations, while affirming the intention to move towards the -4.5 per cent target in FY26. Government cash balances are high, and revenues have been faring well (including the windfall from the RBI surplus transfer), providing the headroom to cut back on borrowings, if necessary. While an outright demand stimulus is not on the cards, there is a small likelihood of steps to boost discretionary demand via allowances or rebates.

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5.RBI Governor Shaktikanta Das mentioned that India's strong growth momentum allows policy space to focus on price stability and manage the vulnerability of inflation. Looking ahead, do you anticipate challenges for the RBI in formulating its FY25 policy, considering potential risks from geopolitical headwinds and high interest rates on the growth outlook? When do you expect a rate cut this year, and how many?

While considering the path ahead for monetary policy, the RBI monetary policy committee is expected to weigh domestic and global developments. In the near-term. potential adverse impact on farm output from a heatwave, which coincides with reservoir levels at multi-year lows, is a risk to monitor. 

Encouragingly, the intensity has decreased in the eastern and southern belts, with temperatures high elsewhere, impacting the zaid crops. The weather agency’s forecast for a normal monsoon is encouraging, accompanied by a dissipating El Nino. With reservoir levels below the comparable period last year, the geographical spread of the southwest monsoon becomes important. 

Tying these factors together, India’s rate cuts stand to be delayed considering firmer growth momentum, above-target inflation and US rates that expected to stay higher for longer. An escalation in the geopolitical tensions especially in the Middle East and its fallout on oil/ commodity prices will be under watch.

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