Macroeconomic Review
The global economy in FY24 grappled with slowdown in economic growth
due to persistence of high interest rates, increasing geo-political conflicts, sluggish
international trade, and climate related issues. Notwithstanding the uncertain global
economic backdrop, the Indian economy continued on its strong growth trajectory in FY24 on
the back of some of its key inherent strengths, viz. macrofinancial stability
(characterised by a steadfast inflation targeting regime, adherence to fiscal
consolidation roadmap, manageable current account deficit and stable exchange rate along
with an adequate buffer of forex reserves), strong twin balance sheets of banks and
corporates, and front-loading of public capex in key sectors.
Throughout FY24, the Indian economy has maintained its stature as the
fastest growing country in the world. The growth outlook was frequently revised upwards
following better-than-expected quarterly growth numbers during the year.
As per the second advance estimate of the National Statistical Office,
the Indian economy is estimated to have grown by 7.6% in FY24 compared to 7% in FY23. The
strong growth performance is driven by strong momentum in the industrial sector and public
capex thrust. The services sector too remained resilient in FY24. The agriculture and
allied sector is estimated to have grown by 0.7% in FY24 compared to 4.7% in FY23 due to
the presence of El Nino conditions. However, relatively higher mandi prices for major
agricultural crops and increased allocations under MNREGA acted as the income stabilisers
for rural belts.
*As per the RBI Governors media interactions
The Consumer Price Index (CPI) based inflation moderated in FY24 albeit
with heightened volatility due to food price shocks. Prices of cereals, pulses,
vegetables, and spices surged to double-digit levels during FY24, and intermittent
vegetable price shocks kept the overall food inflation levels highly volatile. On the
positive side, the decline in core inflation persisted throughout FY24 and touched 3.25%
in March 2024, its lowest level since January 2012. RBI has reiterated its policy
imperative of bringing down headline inflation to 4% on a durable basis. Consequently,
after hiking the policy repo rate by 250 bps in FY23, it stood firm on its policy repo
rate (6.50%) and stance (withdrawal of accommodation) during FY24. The Wholesale Price
Index (WPI) based inflation collapsed in FY24 and averaged -0.70% during FY24 versus 9.41%
during FY23, primarily due to deflation in manufactured product prices on the back of
moderation in global commodity prices. The Central Government hastened its adherence to
the fiscal consolidation roadmap in FY24 by containing fiscal deficit to GDP ratio at 5.8%
(marginally better than the budgeted 5.9%), despite a lower nominal GDP growth of 8.9%
compared to the projected growth rate of 10.5% for budget estimates of FY24. Moreover, the
quality of public expenditure continued to improve as the growth in capital expenditure
(28.4%, Y-o-Y) significantly outweighed growth in revenue expenditure (2.5%, Y-o-Y) in
FY24.
India currently holds the fourth-largest foreign exchange reserves (US$
646 Bn as of March 29, 2024) in the world, up from the sixth-largest since the Covid-19
pandemic. The Indian Rupee was stable and moved in a tight range of 81.65-83.40 during
FY24, aided by RBIs both-side interventions in currency markets.
The announcement of Indias inclusion in JP Morgans
Government Bond Index-Emerging Markets (GBI-EM) provided an impetus to debt inflows into
the country. In fact, FPI debt flows significantly jumped since November 2023, typically
known as ‘front loading of inflows to take advantage of favourable price
movements once the bond inclusion takes place in June 2024. Even Bloomberg announced in
early March 2024 that it will include India Fully Accessible Route (FAR)
Market (EM) Local Currency Government Index and related indices, to be
phased in over a ten-month period, starting January 31, 2025. The inclusion of Indian
bonds in these two key indices could attract billions of dollars of foreign investment to
the Indian Government securities (G-Sec) market. This could potentially lead to a decline
in Indian bond yields and strengthen the rupee.
The resilience of the NBFC sector has increased over the years driven
by substantial capital buffers, improving asset quality and robust earnings. Upper Layer
NBFCs recorded a healthy growth in H1 FY24 and their GNPA ratio gradually improved while
capital position remained robust. During H1 FY24, NBFC loan growth (Y-o-Y) was highest for
housing (58.9%) followed by MSME (57.4%), agriculture (52.0%) and micro loans (50.7%).
This reflects the NBFC sectors thrust on ‘financial inclusion. According
to the RBI, the increase in risk weights (on Personal Loans and loans given to NBFCs by
banks) in November 2023 is pre-emptive in nature and in the interest of macro-financial
sustainability.
Outlook for FY25
In recent months, various multilateral agencies have upgraded their
projections for world economic growth in 2024. The International Monetary Fund (IMF) has
revised its global growth forecast to 3.2% in April 2024 (0.1 percentage point higher from
January 2024). It projects Indias GDP to grow at the rate of 6.8% in FY25. On the
inflation front, the RBI projects CPI based headline inflation at 4.5% in FY25, assuming a
normal monsoon year. The unwavering inflation targeting regime supported by the
contractionary fiscal policy should help in moderating inflationary pressures on a
sustained basis. The Central Government has envisaged to bring down its fiscal deficit to
5.1% of the GDP in FY25 from 5.8% in FY24. The intended augment to public capex will augur
well for infrastructure and construction industry groups. More importantly, the Central
Government has budgeted lower market borrowings in FY25 than in FY24 which will reduce
supply pressure on the markets which will have favourable influence on interest rates.
As per India Ratings, the growth rate in AUM of NBFCs will moderate in
FY25 compared to FY24. Following increase in risk weights by the RBI, costs of funds for
NBFCs from banks have increased and is likely to remain elevated in FY25. The incremental
funding requirement for the NBFC sector will be Rs. 4.5 Tn in FY25 and the volume of
public NCDs might go up in FY25.
Geopolitical Tensions
Geopolitical risks remain high, as reflected in the surge of container
shipping costs in recent months due to hostilities in the Red Sea and disruptions in other
key global trade routes. Moreover, disruption in supply chain due to conflicts in the
Middle-East could have a sudden adverse impact on crude prices, which will have a huge
bearing on Indias balance of payments. There will be a significant impact on
Indias growth, inflation and CAD if Brent crude prices breach the US$ 110 per barrel
ceiling.
Climate Risks
The world witnessed the hottest year on record in 2023. India witnessed
the driest August in 2023. Such instances of extreme climate events are getting frequent
and therefore, there is a rising apprehension that the Paris agreement limit may be
breached sooner than expected.
Pessimistic Global Scenario
There will be heightened economic and financial instability if the US
and Europe enter a recession with significant political upheavals. A prolonged slowdown in
advanced economies could have second-order implications on financial stability and supply
chain disruptions.
Domestic Risks
Vagaries of Monsoon
The India Meteorological Department (IMD) has predicted above normal
south-west monsoon in 2024, with La Nina conditions likely to develop during
August-September 2024. However, what matters for the agricultural performance is the
distribution of rainfall, in spatial as well as temporal terms. If rainfall distribution
happens to be skewed in 2024, it will further add to the ongoing stress in rural belts,
especially for the lower income groups.
Further Delay in Private Capital Spending
In the past few budgets, Indias Central Government prioritised
capital spending and supported the State Governments for doing so. This helped India
achieve higher growth rates during the post-pandemic period. However, the private
sectors response to the Governments investment push has been inadequate so
far, contradicting the expectation that public investment would crowd-in private
investment. Going forward, the Government will be unable to sustain high levels of capital
spending, while addressing the issues of fiscal consolidation and supporting social
spending on basic welfare schemes.
Higher for Longer Interest Rates
If recurrent food price shocks prompt the Monetary Policy Committee
(MPC) of RBI to keep interest rates higher for longer, then it will increase debt costs
for consumers and businesses, likely leading to slower economic activity during FY25.
Extended Weakness in Exports
Indias cumulative merchandise exports growth during FY24 was
-3.1% (Y-o-Y) versus 6.7% (Y-o-Y) in FY23. Indias investment cycles are closely
interlinked with the exports cycle. If the talk of a soft landing for the global economy
proves wrong, given the risks from populism to protectionism, military conflict to the
climate crisis, and China to Wall Street, there is a high likelihood that Indias
exports and investments will weaken further and act as a drag on domestic growth during
FY25.
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