Tuesday's Talking Points
Short Term Volatility notwithstanding.. Long Term India Story is Still Intact!
What’s the Point?
Short term volatility in markets on account of various recent events have pulled up India Volatility Index (Vix) to 26.7 as of 4 June 2024, 75% higher by than the average of 15.3 for CY2024 so far. As per the GDP data released last week, Indian economy grew at 8.2% in FY24, with Q4 growth reporting 7.8% YoY growth in real terms (i.e. growth after adjusting for inflation). India’s economic growth has been higher than expectations set by economists for some quarters now. Momentum in economic growth continues to be strong and corroborates the narrative – high growth is being led by increasing capital expenditure, along with a pick-up in the manufacturing sector. Expectations of an above-average monsoon could lead to a stronger rural economy, and drive up FY25 growth. Higher GDP growth bodes well for corporate profits, and equity markets in the long term.
Numbers in Perspective
Source: Centre for Monitoring Indian Economy (CMIE), International Monetary Fund (IMF)
Key Talking Points from the GDP Numbers
- Reducing gap between nominal and real GDP growth
While real GDP growth reported a high 8.2%, nominal GDP growth for FY24 stood at 9.6%, meaning a difference of ~1.3%. This figure is known as the change in the GDP deflator. A drop in the GVA deflator growth can be ascribed to the deceleration in WPI (Wholesale Price Index), with FY24 average WPI inflation being negative 0.6%.
- Difference in GDP and GVA
The popularly tracked figure, the GDP, can be explained in terms of Consumption, Investment, Government Expenditure and Net Exports. An industry level production estimate is found within the GVA (Gross Value Added) which is broken down into Agriculture, Industry and Services. The difference in GVA and GDP is Net taxes.
In FY24, GDP growth was 8.2% while GVA growth came in at 7.2%. This shows that a large part of the GDP jump came in because of increase in tax collections and reduction in subsidies. Going forward, with reducing pace of subsidy reductions, this difference could narrow as per analysts’ estimates.
- High Growth in Investments continues, with Private Capex kicking in
Investments in the economy, measured by Gross Fixed Capital Formation (GFCF), grew at 9.9% in FY24, growing faster than GDP. While government capex continues to grow at a strong pace, private capex is also seeing turnaround. CMIE data indicates that 84% of new project announcements (in ₹ terms) in the past 12 months were from the private sector. Capex reported by Listed corporates has also grown sharply.
- Consumption – Strong Growth Potential
Continuing its trend from late FY23, FY24 saw weak private consumption growth, at just 4% YoY in real terms. Consumption has multiple factors in its favour for higher growth going forward, such as expectations of an above-average monsoon, expectations of a better crop harvest, decreased inflation, higher consumer sentiment along with positive indicators of urban demand like increased vehicle sales. Read our recent report on Rural consumption here.
- Manufacturing and Construction Sectors continue recovery
Among sectors, Manufacturing recorded a third consecutive quarter of high growth, at 8.9% in Q4FY24 on a relatively lower base. In fact, it is encouraging to see momentum continue, with May and April manufacturing PMI (Purchasing Manager’s Index) at 57.5 and 58.8 respectively, 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.
Construction has also been reporting high growth (9.9% YoY in FY24), a corollary to higher GFCF. With expectations of continued government capex and pick up in private capex, outlook for this sector remains positive.
Some other talking points:
- Rating upgrade on the anvil: Recently, S&P Global ratings upgraded the outlook for India’s sovereign ratings to ‘positive’ from ‘stable’, on account of robust growth and quality of government expenditure.
- Fiscal deficit also shows drop: As per latest figures, India’s fiscal deficit reported at 5.6% of GDP for FY24, lower than the revised budget figure of 5.8% of GDP. Lower fiscal deficit could help keep inflation in line, along with improving prospects of a rating upgrade.
Conclusion
Rise in short term volatility in markets on account of various events have led to worries in the minds of some investors. India’s GDP outlook for the long term remains positive on account of improving labour and capital supply and productivity. Resulting growth in profits for corporates could hold market return expectations steady in the long term.
Higher than expected growth in FY24 has improved the outlook towards economic growth for India, with several analysts mentioning upgrades / potential upgrades to FY25 GDP growth estimates. RBI expectations for FY25 GDP growth currently stand at 7%, higher than IMF expectations of 6.8%. With the world undergoing a growth slowdown, India may find it difficult to sustain high levels of growth. Near term risks include global headwinds from continued higher interest rates, evolving geopolitical developments, and crude oil prices.
Sources: CMIE, IMF, and other publicly available information
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here please write to us at [email protected]
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