Tale of two halves: Goldman sees GDP powered by govt, private sector

In calendar year 2024 (CY24), economic growth “is likely to be a tale of two halves", Goldman Sachs said in a report released on Monday, titled India 2024 Outlook. While government spending will drive growth in the first half, private investment will accelerate after the general election to become the key driver of growth.

In the first half of CY24, the bank expects subsidies and transfer payments to drive growth as the country heads into general elections in May. “Post-elections, we expect investment growth to re-accelerate, especially from the private side. While we expect the government to continue its focus on capital spending, given the medium-term fiscal consolidation path, the rate of growth in capex will likely decrease from the next fiscal year," it added.

According to Goldman Sachs, risks around India’s growth outlook are evenly balanced with the main domestic risk emanating from political uncertainty with elections in May 2024.

Others, too, have given comparable GDP growth estimates for the ensuing fiscal years. The Reserve Bank of India (RBI) has forecast 6.5% for both FY24 and FY25, though it did refer to risks to this growth path.

In September, Fitch Ratings retained its growth forecast for the current fiscal at 6.3%, saying the Indian economy continues to show resilience despite tighter monetary policy and export weaknesses. It also expects India to maintain 6.5% GDP growth until FY25.

S&P Global has predicted 6% GDP growth for FY24, citing a slowing world economy, rising risk of subnormal monsoons and the delayed effect of a rate hike. At the same time, it estimated 6-7.1% GDP growth during 2024-2026, calling India’s growth prospects “strong".

Rating agency Moody’s Investor Services has retained its GDP growth estimate at 6.7% for CY23, stating that the country has shown remarkable resilience amid a global slowdown buoyed by solid domestic demand. Interestingly, while demand in urban areas has growth, rural demand has been tepid due to the uneven monsoons and slow recovery after the covid-19 pandemic.

Goldman Sachs, meanwhile, expects headline inflation to average 5.1% in CY23 due to supply-side shocks. “We expect government intervention to keep a lid on food inflation, where possible, in an election year," it said. “We expect core inflation to only decline to 4.5% y-o-y (average) in 2024 from an estimated 5.1% in 2023, given food and oil supply shocks and a steady growth outlook."

India’s Consumer Price Index (CPI)-based inflation, also referred to as retail inflation, fell to a four-month low of 4.87% in October as food prices eased. In October 2022, retail inflation was at a much higher 6.77%. CPI inflation remained within the RBI’s comfort zone of 2-6% for the second consecutive month in October.

However, an increase in international oil prices due to the conflicts in Israel and Ukraine, and further volatility in food prices, especially of staple vegetables like onions and tomatoes and pulses, continue to pose inflationary risks.

At its latest rate-setting meeting in October, the RBI kept the repo rate unchanged at 6.5%. Earlier this month, the US Federal Reserve, too, held its key interest rate in a target range of 5.25-5.5%, where it has been since July.

“Somewhat elevated inflation relative to target will limit the room for monetary easing—we forecast the RBI to stay on hold until Q4 2024 and then cut only 50 bps (basis points) cumulatively by early 2025," Goldman Sachs said in the report. “The higher-for-longer global scenario and elevated inflation domestically will mean continued hawkish guidance and tight banking system liquidity from the RBI."

A basis point is one-hundredth of percentage point.

Meanwhile, in a separate report, Goldman Sachs said that while certain external shocks could elevate market volatility, India would be relatively less sensitive to these. Such shocks would include higher interest rates globally, persistent strengthening of the US dollar, lower Chinese growth and greater geopolitical uncertainty due to the conflicts in Israel and Ukraine.

The report, titled Asia-Pacific Portfolio Strategy, said Goldman Sachs expects corporate profits in India to grow 15% in CY24 and another 14% the year after, with growth appearing broad-based across sectors. “An improving profit-to-GDP ratio and stabilization in a decade-long EPS downgrade cycle in recent years suggest a turnaround in the earnings cycle," the report said.