Opinion
India's economy in 2024: A stable growth path is now within sight.
Summary
- Optimism is in the air despite some uncertainties and lingering concerns around the global environment, domestic rural demand and private investment. Our focus should move to growth that’s more broad-based and inclusive.
The year 2023 is ending on a positive note for the Indian economy. GDP growth in the second quarter of 2023-24 came in much better than market expectations at 7.6%, led by a strong rebound in the manufacturing sector, even while services-sector growth remained healthy. Investment saw a strong rebound led by increased capex by the Centre and state governments. High-frequency economic indicators like GST collections, core sector growth, car sales and passenger traffic are also reflecting healthy economic growth. Inflation has been on a downward trajectory, with consumer price index (CPI) inflation close to 5%. The corporate sector is also in good shape, as reflected by our credit ratio of 1.67 (number of upgrades to downgrades) in the first half of 2023-24, which is better than the long-term average of 1.5. The critical question for 2024 is whether India’s growth momentum will be sustained. Let’s take a closer look:
Global uncertainties to linger: The new year will continue to see a weakness in overall global growth. The IMF expects global GDP growth to slow to 2.9% in 2024, slightly lower than its 2023 estimate. Some major economies like the US and EU will feel the bite of interest rates staying higher for longer, as indicated by their central banks. This will keep India’s merchandise exports muted in 2024, as has been the case this year. While services exports are likely to remain healthy, note that their growth has been decelerating; it has moderated to an average of 5.5% in the last three months, as against an average 24% seen in the first three months of the year.
Increased geo-political rifts: Even as the Russia-Ukraine war lingered, the global economy was hit by this year’s Israel-Hamas war. Geo-political concerns are likely to continue in 2024 and any worsening of geo-political rifts will pose risks for commodity prices. But with China’s economy likely to remain weak, demand-side pressure on these prices will be weak. Climate related risks and their impact on the prices of agricultural commodities are another factor that we need to watch out for.
Expect strong urban consumption but rural demand may remain shaky: India has been seeing strong consumption demand in urban zones, as reflected by robust passenger car sales, a surge in travel and tourism and bustling retail sales. However, rural demand has been muted, as also indicated by FMCG offtake. This year’s skewed monsoon could jeopardize the rural demand recovery. As per first advance estimates, kharif crop production is lower by 4.6% year-on-year in 2023 and rabi season sowing has also been adversely impacted. Hence, we may see high food inflation linger, which would dampen rural demand further.
High consumer borrowing to continue: India has been seeing a sharp increase in personal loans. The Reserve Bank of India (RBI) on a cautious note has introduced stiffer capital requirements for banks and NBFCs in the context of their exposure to unsecured personal loans. While this may somewhat moderate their growth, the overall trend of high personal loan growth is likely to continue. This appears to be a structural change in the economy—in line with high aspirations among the youth and their growing consumption. This trend will also be supported by digitization trends across the Indian economy.
Private investment is likely to pick up gradually: The moot question now is whether private investment will pick up meaningfully in 2024. The order books of capital goods companies have been filling up. From a representative sample of five such firms, we find that order books have grown by 15% in this fiscal year’s first half, as against compound annual growth of around 5% in the previous four years. This could indicate a pick-up in capex going forward. There is concern that private investors may be wary of policy uncertainty as general elections are due in 2024, as reflected by a sharp drop in private investments announced in the second quarter of this fiscal year (as per CMIE). Decisive mandates in all five state polls held recently would give investors confidence.
RBI could move towards easing monetary policy: In the near-term, RBI is likely to remain cautious, given high food inflation. However, it could consider rate cuts from the second quarter of 2024-25, as CPI inflation moves closer to its 4% target. However, it is likely to be a shallow rate-cut cycle.
China plus one benefits: With a wider chasm between the US and China, India was expected to benefit from ‘China plus one’ corporate strategies. While some investments and trade have come in, the effect so far has been modest. US imports from India rose by $31 billion between 2018 and 2022, while those from Vietnam rose by $78 billion. A big change on this front in 2024 is unlikely, but over time, India is likely to benefit, given the high levels of interest shown by global players in ‘Make in India.’
India is entering 2024 on a confident note with high growth and moderating inflation. There are uncertainties and lingering concerns around the volatile global environment, weak domestic rural demand and a slow pick-up in private investment. But overall, the mood is optimistic. As our economy moves to a more stable growth path, our focus should move to growth that’s more broad-based and inclusive.
