Tuesday's Talking Points
India Growth Story continues to surprise!
What’s the Point? (A Brief Summary)
As per the quarterly GDP numbers released last week, Indian economy grew at 7.6% in real terms (i.e. growth after adjusting for inflation) in Q2FY24. This growth was higher than expectations set by economists, and cements India’s position as the fastest growing major economy in the world. The underlying economic data is corroborating the narrative – high growth is being led by increasing capital expenditure and government spend, along with a pick-up in the manufacturing sector. Higher GDP growth bodes well for corporate profits, and in turn, equity markets.
Putting Data into Perspective
India’s Economic Growth continued its Strong Momentum in FY23
Source: CMIE
Looking forward – India is expected to be the fastest growing major economy
Source: 2023 / FY2024 growth expectations from IMF World Economic Outlook.
Significant Rise in Capex across Government and Listed Corporates
Source: I-Sec Research
Key Takeaways from the GDP Numbers
- High Growth in Investments continues, with Private Capex kicking in
Investments in the economy, measured by Gross Fixed Capital Formation (GFCF), grew at 9.5% in H1FY24, and at 11.0% in Q2FY24. While government capex continues to grow at a strong pace, private capex is also seeing a turnaround. CMIE data indicates that 86% of new project announcements (in Rupees terms) in the past 12 months were from the private sector. Capex reported by Listed corporates has also seen a sharp growth (see chart).
- Consumption – Strong Growth Potential
Continuing its trend from late FY23, FY24 has also seen weak private consumption growth. Private consumption has grown at 4.5% in H1FY24. Consumption has multiple factors in its favour for higher growth going forward, such as improving rural wages, expectations of a better crop harvest, decreased inflation, along with positive indicators of urban demand like increased vehicle sales.
- Manufacturing and construction sector showing signs of pick-up
Among sectors, Manufacturing recorded the highest growth, at 13.9% in Q2FY24 on a relatively lower base. In fact, it is encouraging to see momentum continue, with October and November manufacturing PMI (Purchasing Manager’s Index) at 55.5 and 56.0, indicating expansion over the previous months. In the long term, the relocation of Global supply chain towards India and ASEAN countries (China +1) indicate acceleration over the coming decade. Construction has also been reporting high growth (10.5% YoY in H1FY24), a corollary to higher GFCF. With expectations of continued government capex and pick up in private capex, outlook for this sector remains positive.
Conclusion
While Indian Equity Markets are hitting fresh all-time highs, it is pertinent to note that other indicators such as the nominal GDP, corporate earnings, are also hitting all-time highs.
Higher than expected growth in FY24 so far has improved the outlook towards economic growth for India, with several analysts mentioning upside ‘risks’ to their FY24 GDP growth estimates. RBI expectations for FY24 GDP growth stand at 6.5%, higher than IMF expectations of 6.3%. In fact, analysts have reported that they expect RBI to also increase its GDP growth estimates later this week with the announcement of the monetary policy. With the world undergoing a growth slowdown, India may find it difficult to sustain growth. Near term risks include global headwinds from higher interest rates, evolving geopolitical developments, crude oil prices, and the potential impact of El Nino on agricultural output and rural demand.
Sources: CMIE, IMF, I-Sec Research, RBI, Informist, MoSPI and other publicly available information.
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