Author: Growthfiniti@admin

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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Here are the key points from the April’24 CPI:

• Inflation remained stable and within the RBI’s acceptable range. However, increased prices of fruits and vegetables due to seasonal factors added pressure to the food prices. The RBI has highlighted the importance of monitoring food price inflation closely, although expectations of a normal monsoon in the second half of FY25 may alleviate some concerns. With inflation above 4% and strong economic growth, it is anticipated that the Monetary Policy Committee (MPC) will maintain its pause on interest rates.
• Headline inflation remained steady at 4.9% compared to the previous month and 4.7% from April’23, with a sequential price rise of +48 basis points.
• Core CPI continued its downward trend for the eleventh consecutive month, decreasing to 3.2% from 3.3% in the last month, with a monthly increase of 55 basis points compared to 17 basis points previously.
• Food and beverage prices, particularly fruits, experienced a significant increase, contributing to a 63 basis points rise in food inflation compared to a 21 basis points rise in the previous month.
• Fuel and light prices saw a 1% decrease compared to a cumulative 2.8% deflation over the last two months. Housing prices increased by 1%, while prices for pan/tobacco and clothing rose by 0.4% and 0.2%, respectively.
• Services inflation accelerated to 0.6% compared to a 0.2% rise over the past four months, with the highest increase observed in personal care (0.3%). Transport & communication prices fell by -0.2%.
• The gap between rural and urban CPI narrowed slightly, with rural inflation easing to 5.4% from 5.5% in the previous month, while urban inflation remained stable at 4.1%.

In summary, CPI remained stable at 4.9%, with core CPI easing to 3.2%. Food inflation was driven by increases in fruit and vegetable prices, while services inflation increased, led by personal care. The rural-urban CPI gap narrowed slightly.

CPI inflation eased to 4.85% YoY in March 2024, mainly due to a further decline in core inflation to 3.25% YoY, with all components of non-food inflation continuing to decrease, many reaching multi-year lows. Vegetable inflation, although slightly lower at 28.3% YoY compared to February’s 30.2% YoY, remained the primary factor driving food and beverage inflation to 7.7% YoY. While food and energy inflation are influenced by supply factors, core CPI reflects the effectiveness of monetary policy. Significant base effects are expected to impact food inflation in the next six months, leading to a moderation below 7% YoY by June 2024 and below 6% YoY by September 2024. With core inflation likely to remain subdued, headline CPI inflation is projected to average 4.7% YoY in Q1FY25 and 3.6% YoY in Q2FY25, potentially allowing for a 25 basis point reduction in the policy repo rate by August 2024, followed by a further cut to 6% by October 2024. However, the possibility of a rate cut at the June 2024 MPC meeting is increasing, contingent upon the pace of moderation in headline CPI inflation in April and May 2024.

Despite its limitations, the Index of Industrial Production (IIP) indicates a stronger industrial recovery in February 2024. However, the IIP fails to fully capture the impact of technological advancements and changes in a rapidly evolving economy like India’s, particularly in sectors such as electronics, pharmaceuticals, and motor vehicles. Nevertheless, after a sluggish period from November 2023 to January 2024, both the manufacturing (+5% YoY) and industrial sector (+5.7% YoY) accelerated in February 2024, with expectations of even stronger growth in the final month of FY24 (March 2024). Manufacturing, as measured by GDP, is anticipated to have grown over 10% YoY in Q4FY24.

Lower interest rates are expected to support an industrial acceleration in FY25. Despite limitations, the IIP shows growth in sectors like base metals, motor vehicles, and infrastructure/construction goods in February 2024 and throughout FY24. Consumer non-durables, however, declined in February 2024 but showed positive growth in the April 2023 to February 2024 period. The robust rabi crop is poised to boost rural demand and consumer non-durable output in the April to June 2024 quarter. With anticipated interest rate reductions in August to October 2024 and the likelihood of the fiscal deficit undershooting official expectations, private investment is expected to increase, particularly in capital goods and consumer durable sectors, driving economic acceleration in FY25.

March witnessed a notable drop in the trade deficit to USD15.6 billion, the lowest in 11 months, primarily due to a decline in imports, particularly in gold. Despite this, exports saw a slight increase. However, the oil deficit increased due to rising imports and falling exports, alongside higher crude prices. On an annual basis, both exports and imports decreased. For the fiscal year FY24, exports amounted to USD436.7 billion, down by 3.2%, while imports stood at USD677.5 billion, a 5.4% decrease, resulting in a goods trade deficit of USD240.8 billion. Gold imports notably rose by 30.1% YoY due to increased prices and volumes, while oil imports declined by 14% YoY.

Core exports experienced positive growth for FY24, with March marking the fifth consecutive month of core deficit reduction. Major export categories, excluding petroleum, witnessed significant growth both on a monthly and yearly basis. However, gold imports plummeted sharply in March due to lower volumes amid record-high gold prices.

In March, the services trade surplus decreased to USD12.7 billion, marking an eight-month low. Both exports and imports declined by approximately 6% MoM, contributing to the surplus decline. Despite a robust performance earlier in the fiscal year, recent months have seen a slowdown in the services surplus, potentially indicating challenges for the sector in FY25.

For Q4FY24, a current account surplus of 0.2% of GDP is anticipated, driven by better-than-expected goods and services exports, particularly in software. FY24E CAD/GDP is projected at 0.8%, with a BoP surplus of USD42 billion, supported by healthy FPI flows. However, risks such as higher commodity prices and geopolitical tensions may impact these forecasts. Looking ahead to FY25, non-IT services are expected to maintain positive momentum, while goods and IT exports may face slower growth amid weakening global demand. With Brent projected at USD85/bl, FY25E CAD/GDP is expected to remain comfortable at 1.1-1.2% of GDP.