India Ratings and Research (Ind-Ra) has revised upwards its GDP growth estimate for FY24 to 6.7 per cent from 6.2 per cent earlier.
The revision is led by a number of factors, including the resilience of the Indian economy (which grew 7.6 per cent yoy in 2QFY24); sustained government capex; the deleveraged balance sheet of corporates/ banking sector; prospects for a new private corporate capex cycle; and sustained momentum in business and software services exports, coupled with remittances from across the world .
The revision comes on the heels of Reserve Bank of India upping its GDP growth forecast for 2023-24 by 50 basis points to 7 per cent, from 6.5 per cent earlier. Several multilateral institutions and global banks have also recently raised their growth projection for India.
However, Ind-Ra highlighted that there are risks to global growth, including a trade slowdown, tightening monetary policies of the central banks of advanced countries, and a volatile geopolitical situation.
“All these risks will continue to weigh on and restrict India’s GDP growth to 6.7 per cent in FY24 (FY23: 7.2 per cent). Quarterly GDP growth, which came in at 7.8 per cent yoy and 7.6 per cent yoy in 1QFY24 and 2QFY24 respectively, is slated to slow down sequentially in the remaining two quarters of FY24,” Sunil Kumar Sinha, Principal Economist, Ind-Ra said.
Fiscal deficit a challenge
Ind-Ra expects meeting the fiscal deficit target of 5.9% of GDP for 2023-24 will be a challenge.
Higher tax and non-tax revenues are expected to more than offset any shortfall in disinvestment revenues in FY’24.
However, higher-than-budgeted revenue expenditure triggered through the first and likely second supplementary demand for grants, in combination with lower-than-budgeted nominal GDP, will push the fiscal deficit to 6 per cent of GDP, 10 bps higher than the budgeted 5.9 per cent.
Inflation to moderate
Ind-Ra expects average retail and wholesale inflation (WPI) to come in at 5.3 per cent and 0.6 per cent, respectively, in FY24. Retail inflation declined to 4.87 per cent in October 2023, from an intra FY24 peak of 7.44 per cent in July 2023, but again increased to 5.55 per cent in November 2023, indicating uncertainty about its trajectory.
Ind-Ra, however, expects retail inflation to cool off to 5.1 per cent and 4.7 per cent in 3QFY24 and 4QFY24, respectively, as against the RBI’s forecast of 5.6 per cent and 5.2 per cent, respectively.
Unless inflation stabilises around the 4 per cent mark, it believes the RBI might not go for monetary easing and, therefore, remain in the pause mode on the repo rate front in the near term, while keeping an eye on core inflation, which came in at 4.1 per cent in November 2023. Ind-Ra expects interest rates on the 10-year G-sec to be in the range of 7.15-7.25 per cent by end-FY24.
CAD to narrow
It expects the current account deficit to narrow to 1.3 per cent of GDP in FY24 (FY23: 2.0 per cent) in response to the evolving domestic and global demand conditions. Due to the uncertain external demand, merchandise exports are expected to fall 9.3 per cent yoy in FY24 (FY23: 6.3 per cent) and goods imports to 7.9 per cent yoy (owing to softening of global commodity prices) (16.6 per cent).
Therefore, the trade deficit is estimated to come in at $260.7 billion (7.3 per cent of GDP), but sustained remittances and software exports, as in the past, would provide relief to the current account.
Flows in the capital account are estimated to improve to $73.8 billion in FY24, from $58.9 billion in FY23.
As a result, there would be a net addition of $29.8 billion in forex reserves in FY24 (excluding cross currency valuation gain/loss).
Ind-Ra expects this to help the Indian rupee to average 83.05/USD in FY24, and the RBI’s intervention in the forex market to keep a lid on rupee volatility.
