Key Motivators Powering Our Improvements

The current recovery is being driven by a combination of favorable cyclical and structural factors. Improving macro stability through stronger balance sheets across all economic agents and lower inflation and a smaller current account deficit, which eases the pressure on policy makers to tighten their monetary stance and implement structural policy reforms, key drivers are those who maintain the strength of this reform. Against this backdrop, we discuss where we are in the growth cycle and the factors facilitating a strong growth path going forward.

On the consumption front, urban demand is supported by lower household debt relative to per capita income as well as a healthy trend in labor market conditions and improving consumer sentiment. Moreover, the trend of moderating inflation through improvement in consumer purchasing power and subsequent moderation in inflationary expectations augurs well for rural consumption. We believe the gap between rural and urban consumption will narrow this financial year, thereby ensuring a broad-based pick-up.

Another important driver of India’s growth is capital expenditure. Delayed private sector balance sheets, targeted supply-side policy measures and a strong government stimulus for public capex have set the stage for a long-term capex upcycle. The last few years have seen an improvement in the quality of government spending, with the share of capital expenditure relative to revenue expenditure rising steadily. Besides, improving business sentiment and investor confidence also bode well for crowding-in of private investments. In fact, green shoots of capex pick-up are visible in high-frequency data, with capacity utilization rates above long-term averages and new private investment (adjusted for inflation) higher than in 2010 in the quarter ended March 23. is close to its highest since. Capital expenditure assumes significance in terms of its large multiplier effect on growth and employment opportunities across sectors.

Within exports, services exports defied the trend of weak global growth, registering double-digit growth driven by resilience in IT exports. We expect this boom in service exports to continue, with a stronger growth momentum than goods exports.

The above factors support our constructive view on India’s growth story, as we expect it to fire on all cylinders, ensuring a comprehensive improvement in growth fundamentals. Thus we see a strong growth trend, as we estimate GDP growth for FY24 and FY25 at 6.2% and 6.5% respectively.

An important contributor to this safe macro-economic outlook is the benign trend in macro-stability indicators for the current and next financial year. In April, headline consumer price index (CPI) inflation was at an 18-month low of 4.7% year-on-year (YoY), while the wholesale price index moved into deflationary territory with a 34-month low WPI inflation reading. -0.9% YoY, even as our trade deficit widens to $15 billion, a 20-month low.

In our analysis, India’s macro sustainability indicators will improve in FY24. This recovery will be supported by improving terms of trade (commodity prices lower than last year), a healthy growth mix (more capex driven), recovery in export market share and normalization of real rates.

Our headline CPI estimate is 5.2% YoY for F24 and 4.8% YoY for F25, which are within the target bands prescribed by the Reserve Bank of India. The key risk to the track in the short term emanates from weather-related seasonal shocks from El Niño, which could have a potential impact on food inflation. On the external balance front, we expect the current account deficit to narrow to around 1.1% of GDP in F24 and 1.5% of GDP in F25, within policy-makers’ comfort limits. Risks can emerge from the trade shock of adverse terms.

In our view, macro-stability tailwinds mean that monetary policy may be pivoted, although policy rates are likely to remain on hold through 2023. FY23 quarter. This allows us to assume that real rates will track in positive territory, which bodes well from a macro-stability perspective.

While India’s growth outlook remains encouraging, we should closely watch domestic and global macro-economic developments for anything unexpected. We view risks as evenly balanced, emanating from cyclical and external rather than domestic or structural sources. Key risk factors include weak global growth impacting export demand and thus global financial conditions impacting business sentiment, risk sentiment and capital flows, commodity prices impacting broad stability indicators and, ultimately, India’s growth- Including meteorological vagaries affecting the versus-inflation outlook.

Upasana Chachra is the chief India economist at Morgan Stanley.

Updated: June 13, 2023, 01:08 AM IST