Markets
Global recession fears: What sets India's economy apart from the rest?
Summary
- A series of high-frequency indicators, such as manufacturing data, capex from state and central governments, and tax receipts, both direct and indirect, have been on an uptick recently. These all bolster the health and promise of India's economic landscape
Indian equities have been upbeat as foreign institutional investors have remained net buyers of local shares since March. The Indian economy seems relatively better placed than peers amid fears of a global recession and more interest rate hikes by central banks of developed economies.
A series of high-frequency indicators, such as manufacturing data, capex from state and central governments, and tax receipts, both direct and indirect, have seen an uptick recently. These all bolster the health and promise of India's economic landscape, but what makes it outperform other Asian markets?
“We believe there is a key driver at the heart of this exuberance - lower commodity prices. Oil alone has an impressive sensitivity to growth," said economists at HSBC Global Research in a recent report. “We find that for every USD10/barrel fall in oil prices, gross domestic product (GDP) growth rises by 0.2ppt. Oil prices averaged cUSD100/b in FY23. If it remains at the current level of cUSD75/b, that would imply a $25/b fall in prices, leading to a 0.5ppt increase in growth," added the report.
And that’s not all. According to Gaura Sen Gupta, economist at IDFC First Bank, India’s current account deficit (CAD) is likely to narrow as crude oil prices remain subdued in FY24. She has forecast FY24 CAD to fall to 1.8% of GDP from 2.0% in FY23.
As India is a net importer of crude oil, diminished prices will also cause microeconomic ripples, potentially improving corporate margins. Analysts from Motilal Oswal Financial Services Ltd anticipate the Ebitda margin for companies under their coverage (excluding Oil & Gas and Financials) to swell 80 basis points year-on-year to 19.1%. Similarly, Ebitda (earnings before interest, taxes, depreciation, and amortization) margin for Nifty companies (excluding OMC and Financials) is expected to broaden 110 basis points year-on-year to 20.8% in the quarter.
However, the growth momentum faces potential domestic threats like El Nino, which could negatively impact food inflation and rural demand. The recent rise in vegetable prices also warrants monitoring.
“Monsoon distribution remains uneven which has resulted in a surge in vegetable prices in July. If current trend holds then July CPI inflation could rise to ~6% versus 4.6% expected in June. For the full year FY24 inflation is expected at 5.2% (revised-up from 5.0%)," added the IDFC report.
