India’s gross domestic product (GDP) is expected to grow 5.9 per cent year-on-year (yoy) in the financial year 2023-24, according to India Ratings and Research (Ind-Ra). Although the National Statistical Organisation’s (NSO) first advanced estimate (AE) of FY23 GDP is 7 per cent, it does not expect the growth momentum witnessed in 1HFY23 to sustain in 2HFY23.
NSO estimates GDP growth to drop to 4.5 per cent in 2HFY23 from 9.7 per cent in 1HFY23. The pent-up demand, which had provided thrust to the growth is normalising, exports which had been buoyant are facing headwinds from the global growth slowdown and credit growth is facing tighter financial conditions. The International Monetary Fund (IMF) expects the global GDP growth to fall to 2.9 per cent in 2023, from an estimated 3.4 per cent in 2022.
Sunil Kumar Sinha, principal economist at Ind-Ra, said, “Although there are a few positives for India such as – sustained government capex, deleveraged corporates, low NPA in the banking sector, production-linked Incentive scheme and likelihood of global commodity prices remaining subdued, Ind-Ra believes they are still not sufficient to take the FY24 GDP growth beyond 6 per cent.”
Ind-Ra expects private final consumption expenditure (PFCE) to grow 6.7 per cent yoy in FY24. Yet, it may not lead to a broad-based consumption demand recovery, because the current consumption demand is highly skewed in favour of the goods and services consumed largely by the households belonging to the upper income bracket. The goods and services of mass consumption have yet not shown a sustained pick-up. This to some extent is reflected in the way the recovery in consumer durables and non-durables in terms of Index of Industrial Production has so far panned out in FY23. While consumer durables grew 3.4 per cent yoy during 9MFY23, non-durables contracted 1.2 per cent yoy.
After PFCE, gross fixed capital formation (GFCF) is the second-largest component (FY23AE: 29.4 per cent) of GDP from the demand side. Ind-Ra expects GFCF to grow 9.6 per cent yoy in FY24 (FY23:11.5 per cent), due to the sustained government capex. Expenditure on the capital account and grants-in-aid for the creation of capital assets together in the union budget FY24 have been pegged at Rs 13.71 lakh crore. This is Rs 3.17 lakh crore higher than FY23 revised estimate (RE), an increase of 30.1 per cent. This will push the government capex (including grants-in-aid for creation of capital assets)/GDP to 4.54 per cent (FY23RE: 3.86 per cent).
India Ratings said GFCE had been providing the much-needed support to the economy for a while, averaging 7.9 per cent growth during FY16-FY20. However, due to the government’s focus shifting towards capex, the size of the revenue expenditure in the union budget FY24 has been kept at Rs 35.02 lakh crore, only Rs 0.43 lakh crore higher than the FY23RE of Rs 34.59 lakh crore. Ind-Ra therefore expects GFCE to grow at 2.5 per cent yoy in FY24 (FY23: 3.1 per cent).
The fourth demand-side driver — net exports (exports minus imports) — has been negative over the years and thereby not contributing positively to the aggregate demand. Thus, a reduction in the size of negative net exports would be a positive for aggregate demand. However, with merchandise exports losing steam due to the global growth slowdown and merchandise imports not moderating proportionately, Ind-Ra expects the share of net exports to GDP to increase to negative 9.2 per cent in FY24 from negative 7.1 per cent in FY23.
On the supply side, the agricultural sector has been doing well, and Ind-Ra expects it to grow 3.1 per cent yoy in FY24 (FY23: 3.5 per cent yoy) on the assumption of a normal monsoon in 2023. However, industrial growth is expected to remain tepid because of the ‘K-shaped’ recovery, which is neither allowing the consumption demand to become broad based nor helping the wage growth especially of the population belonging to the lower half of the income pyramid.
Ind-Ra therefore expects the industrial sector to grow 3.9 per cent yoy in FY24 (FY23: 4.1 per cent). Services, the largest component of GVA, is estimated to grow 7.3 per cent yoy in FY24 (FY23: 9.1 per cent). Services sector may face some headwinds from the tightening financial conditions, but some upside may come from the roll-out of 5G which is expected to increase the reach of online commerce, education and telemedicine to remote regions, and create new-age business and associated employment.
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