Author: Growthfiniti@admin

In August 2024, India’s Consumer Price Index (CPI) inflation slightly increased to 3.65% year-over-year (YoY) from 3.60% YoY the previous month. Food inflation also rose, reaching 5.30% YoY in August 2024, up from 5.06% in the prior month.

Vegetables, with a CPI weight of 6.0%, continued to be the main contributor to inflation, followed by cereals (9.7%) and pulses (2.4%). In August, inflation for these items remained high, with vegetables at 10.7% YoY, cereals at 7.3% YoY, and pulses at 13.6% YoY. Overall, food inflation remained broad-based, with 40% of items in the food basket experiencing inflation rates above 6%.

Core inflation, excluding food and fuel, held steady at 3.44% YoY. However, core inflation and its refined measures, which further exclude valuables and transportation fuels, saw an increase in July due to a revision in mobile tariffs.

As of September 12, the monsoon has recorded 8% above-normal rainfall compared to the long-period average. The spatial distribution of rainfall has improved over the past month, with excess rainfall in Central and Southern India, normal levels in the North, and deficits in East and North-East India.

We expect inflation to average around 4.3-4.5% YoY for FY25. Food prices may continue to introduce volatility into headline inflation. The RBI’s Monetary Policy Committee might consider shifting the policy stance to ‘neutral’ in the October meeting, given the above-normal monsoon is likely to alleviate food inflation pressures.

Key Highlights of Q1FY25 GDP Data:

• GVA Performance: Q1FY25 GVA exceeded expectations by 30bps, reaching 6.8% YoY, though GDP was slightly lower at 6.7%.
• Industrial Growth: Industrial sector growth improved to 7% YoY, with manufacturing showing a 7% increase. Electricity output advanced by 10%, supported by a favorable base, while mining also displayed solid growth at 7%. Agriculture growth was softer at 2%, aligning with expectations.
• Services Sector: Services growth remained robust at 8%, driven by Construction (11%), Public Administration & Defense (10%), Financing & Real Estate (7%), and Trade, Hotels, and Transportation (6%).
• Investment and Consumption: Despite the quarter’s elections, GFCF growth was steady at 7%, and private consumption (PFCE) growth rose to 7%, though government spending was weak.
• Trade: Exports increased by 9% YoY on a favorable base, while imports grew by 4%.
• Nominal GDP: Nominal GDP growth was at 10%, up from 8% a year ago.

Summary of Economic Trends:
Q1FY25 economic growth remained strong, despite a high base. The growth in GVA was driven by the manufacturing and services sectors, especially construction, while GDP was supported by a pick-up in private consumption and investments. Looking ahead, factors like an above-normal monsoon, higher agricultural output, continued private consumption growth, festival demand, and a focus on capital expenditure are expected to sustain economic activity. The GVA/GDP estimates for FY25-26 remain at 7-7.5%.

Detailed Breakdown:

• GVA: Q1FY25 GVA stood at 6.8% (PC/Consensus estimate: 6.5%/6.4%), compared to 6.3% in the previous quarter and 8% in Q1FY24.
• Industrial Sector: Industrial growth accelerated to 7%, up from 5% in Q1FY24, with manufacturing also growing by 7% compared to last year’s 5%. Electricity and utilities saw a robust 10% increase, compared to 3% the previous year, while mining growth was moderate at 7%.
• Services Sector: Services GVA grew by 8% compared to 10% in Q1FY24, with Construction leading at 11%, followed by Public Administration & Defense (10%), Financing & Real Estate (7%), and Trade, Hotels, Transport (6%).
• Agriculture: Agriculture GVA growth softened to 2%, compared to 4% the previous year.

GDP Performance:

• GDP Growth: Q1FY25 GDP grew by 6.7% YoY (PC/Consensus estimate: 7%/6.8%), compared to 7.8% in the previous quarter and 8% in Q1FY24.
• Investments: GFCF growth was resilient at 7.5%, slightly down from 8.5% last year, despite the general elections.
• Private Consumption: Private consumption (PFCE) grew by 7%, up from 6% in the same period last year, though there was a sequential dip of -2%, a much slower decline compared to the same period in the previous two years.
• Government Expenditure: Government spending remained similar to Q1FY24 levels.
• Trade: Exports increased by 9% YoY, benefiting from a favorable base, while imports grew by 4%. Sequentially, imports rose by 11% QoQ, while exports fell by -14%.

Key Insights from July CPI and June IIP:

• Headline Inflation: The headline inflation rate dropped below the 4% target, primarily due to a favorable base effect. However, food prices remained a concern, with another significant increase in vegetable prices, as expected. The revision of mobile tariffs also contributed to higher services inflation. Despite the lower overall inflation, driven by the base effect, the RBI’s monetary policy stance is unlikely to be influenced, as inflationary pressures remain elevated.
• CPI Performance: The Consumer Price Index (CPI) eased more than expected to 3.5%, compared to 5.1% last month and 7.4% a year ago. On a sequential basis, inflation rose by 142 basis points (bps) compared to 133 bps last month, largely driven by food inflation, which increased by 247 bps compared to 269 bps last month. This was mainly due to a 14% month-over-month rise in vegetable prices for the second consecutive month.
• Core CPI: Core CPI increased to 3.3% from 3.1% in the previous two months, after a year of consistent decline. The sequential pace of core inflation rose to 56 bps from 11 bps last month.
• Price Increases: Prices rose across most categories except fuel, which saw a slight decline of -0.2%. Housing, clothing, and pan & tobacco prices increased by 0.5%, 0.2%, and 0.2%, respectively.
• Services Inflation: The pace of services inflation accelerated to 0.8% month-over-month, up from 0.3% in the previous two months. The most significant price increase was in transport and communication (1.8%), driven by a mobile tariff hike. Education prices continued to rise by 0.9%, while medical care, personal care, and household requisites saw modest increases of 0.2%-0.3%.
• IIP Growth: Industrial production growth slowed to 4% year-over-year, down from 6% last month and 4% in June 2023. Mining, manufacturing, and electricity sectors registered year-over-year growth of 10%, 3%, and 9%, respectively. Of the 23 industries, 14 saw year-over-year growth, with electrical equipment, computers & electronics, and other transport equipment being the major contributors to the IIP.
• Sectoral Performance: Among use-based segments, consumer durables (9%) led the growth, followed by primary goods (6%), infrastructure goods (4%), intermediate goods (3%), and capital goods (2%). Consumer non-durables contracted by -1%. Sector-wise, 14 out of 23 sectors showed year-over-year growth, with notable increases in electrical equipment (28%), computers & electronics (16%), and other transport equipment (9%). Declines were seen in tobacco products (-11%), pharmaceuticals (-3%), paper products (-2%), textiles (-2%), and beverages (-1%).

Summary:

• CPI: Inflation eased to 3.5% in July, primarily due to a favourable base, but sequentially, it rose by 142 bps. Core CPI also saw an uptick, driven by food and services inflation.
• IIP: Industrial production growth slowed to 4% year-over-year, with mixed performance across sectors.

India maintained its position as the fastest-growing G20 economy, with a real GDP growth of 8.2% in FY24. Although there was a slight deceleration to 7.8% YoY in Q4FY24, the growth from the previous quarter was revised upward to 8.6% YoY. The main driver of this growth over the past two years has been fixed investment spending, which grew by 9% in FY24 but slowed to 6.5% YoY in Q4FY24 due to a pause before the elections. Positive net exports of goods and services, along with restocking, further contributed to real GDP growth.

Buoyed by increased tax revenue, the fiscal deficit decreased to 5.6% of GDP in FY24, surpassing the budgeted estimate of 5.9%. This reduction is expected to encourage more investment in FY25.

With expectations of a La Nina-led above-normal monsoon boosting private consumption and investment spending, as well as an anticipated recovery in exports after the global trade recession, real GDP growth is projected to accelerate to 8.5% in FY25.

Furthermore, income tax revenue experienced significant growth in FY24, surpassing budgetary projections. This, along with growth in Corporate Tax and GST revenue, led to a moderation in both the fiscal deficit and the primary deficit. These lower deficits are expected to exceed the deficit-reduction target in FY25, thereby encouraging more private investment.

Additionally, CPI inflation is expected to decrease to below 4% YoY in Jul-Sep’24, allowing for a 25 basis points rate cut in Aug’24. With the anticipated above-normal monsoon and subsequent moderation in inflation, two rate cuts are expected before the end of FY25. This, combined with an acceleration in private consumption, improvements in net exports, and increased investment, sets the stage for 8.5% real GDP growth in FY25. Services are expected to return to their long-term average growth rate, while manufacturing and construction retain momentum from FY24. Any post-election reforms could further enhance these growth prospects.

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