Market Review
Global economic activity indicators showed signs of so ening in August 2023. In the US, labour market conditions eased as unemployment rate inched up to 3.8% (July: 3.5%), wage growth moderated and job opening fell more than expected. The manufacturing and housing sector activities remained muted and consumer confidence declined. However, consumer spending still remained strong and services PMI in expansionary territory. In the Eurozone, the unemployment rate in July was steady at 6.4% but business activities in August, as represented by PMI, factory output and business confidence surveys, fell sequentially. In China, industrial activity, merchandise exports and real estate activities continued to remain under pressure and many of the high frequency indicators surprised on the downside. In the face of rising growth headwinds, China's regulatory authorities announced multiple measures including easing of regulations, policy rate cuts, etc. to boost sentiments and support growth.
Inflation, although off their peaks, continues to remain above Central Banks' targets in the AEs including the US, EU and Japan. On the other hand, inflation in majority of EMs remain relatively closer to the comfort of respective central banks with major exception being China where the CPI in July 2023 dipped into negative territory.
India Q1FY24 GDP growth rises to 7.8% YoY, likely to moderate going forward: GDP growth in Q1FY24 was broadly in line with consensus at 7.8% YoY. On the demand side, while private consumption, which forms the largest part of the GDP, picked up pace in Q1 a er two quarters of slow growth, Government consumption growth slowed down reflecting the recent slowdown in the Government's revenue spending. Investment demand continued to post robust growth led by both the Centre and State Government capex. On the supply side, growth was led by improvement in Services sector driven by a robust performance of financial, real estate and professional services. Within industry, the construction sector continued to perform well while manufacturing growth also picked up marginally. Agriculture sector growth moderated compared to last quarter.
| Quarter ended (YoY, %) | 31-Mar-23 | 30-Jun-23 | Quarter ended (YoY, %) | 31-Mar-23 | 30-Jun-23 | |
|---|---|---|---|---|---|---|
| GDP | 6.1 | 7.8 | GVA | 6.5 | 7.8 | |
| Private Consumption | 2.8 | 6.0 | Agriculture and allied activities | 5.5 | 3.5 | |
| Government Consumption | 2.3 | -0.7 | Industry | 6.3 | 5.5 | |
| Gross Capital Formation | 7.8 | 7.1 | Manufacturing | 4.5 | 4.7 | |
| GFCF | 8.9 | 8.9 | Construction | 10.4 | 7.9 | |
| Services | 6.9 | 10.3 | ||||
| Exports | 11.9 | -7.7 | Trade, Hotels, Transport, etc. | 9.1 | 9.2 | |
| Imports | 4.9 | 10.1 | PADO | 3.1 | 7.9 |
Source : MoSPI, CEIC. Note – PADO: Public Administration, Defence & Other Services 2) GFCF- Gross Fixed capital Formation
GDP growth rate is expected to slow down as base effect turns unfavorable in coming quarters. While growth is expected to remain relatively resilient driven by strong investment demand and rising private consumption, slowing global growth and high food inflation are likely to act as headwinds.
Indian economic activity remains steady: High frequency indicators show that growth is holding up well. Indicators like power demand (partly due to sub-par monsoon in August), manufacturing and services PMI, digital spending, tractor and MHCV retail sales, GST collections, railway tonnage movement, etc. grew at a robust pace. However, some so ness was visible in select indicators like LCV and PV registrations, unemployment, etc.
| Indicators | Units | Jan-23 | Feb-23 | Mar-23 | Apr-23 | May-23 | Jun-23 | Jul-23 | Aug-23 |
|---|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | |||||||||
| 2W | YoY, % | 10.0 | 14.8 | 12.4 | -7.3 | 9.4 | 6.8 | 8.2 | 4.3 |
| PV | 20.0 | 8.3 | 9.7 | -4.8 | 1.1 | 0.7 | -0.7 | 2.2 | |
| MHCV | 17.5 | 18.8 | 19.9 | 8.8 | 10.2 | 1.0 | 5.7 | 10.2 | |
| LCV | 11.5 | 11.2 | -0.8 | -5.3 | 2.4 | -3.5 | -3.1 | 1.8 | |
| Tractors | 9.6 | 16.6 | 7.2 | 2.0 | 10.2 | 42.7 | 25.2 | 17.0 | |
| Gross GST Collection | 12.7 | 12.4 | 12.7 | 11.6 | 11.5 | 11.7 | 10.8 | 10.8 | |
| Average E-Way bill generated | 19.7 | 18.4 | 16.3 | 12.2 | 19.7 | 15.5 | 16.4 | 19.5 | |
| Power demand | 12.0 | 7.7 | -2.1 | -1.8 | -0.4 | 4.3 | 8.0 | 16.3 | |
| Retail Spending (UPI + IMPS) | 45.7 | 40.7 | 37.5 | 35.6 | 35.0 | 35.5 | 35.7 | 37.7 | |
| Railway Freight Tonnage | 3.9 | 3.6 | 3.8 | 3.5 | 1.9 | -1.9 | 1.3 | 6.2 | |
| Railway Freight Earnings | 13.2 | 11.8 | 10.5 | 6.8 | 4.0 | -1.0 | 0.6 | 0.1 | |
| Manufacturing PMI^ | Index | 55.4 | 55.3 | 56.4 | 57.2 | 58.7 | 57.8 | 57.7 | 58.6 |
| Services PMI^ | Index | 57.2 | 59.4 | 57.8 | 62.0 | 61.2 | 58.5 | 62.3 | 60.1 |
| Unemployment | % | 7.1 | 7.5 | 8.1 | 8.5 | 7.7 | 8.5 | 8.0 | 8.1 |
Source: www.gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, www.vaahan.parivahan.gov.in, www.posoco.in ^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @ - figures are preliminary data and are subject to revision
On an overall basis, India's growth momentum continues to be healthy. While the global growth is slowing, an environment of elevated interest rates and waning of pent-up demand is likely to weigh on growth going forward, India's economic growth is likely to be better than most major economies.
Fiscal deficit widens driven by pick up in revenue spending, capex spending remains strong: Fiscal deficit as a % of GDP rose to 2.1% by the end of July 2023 driven by muted gross tax collections primarily driven by decline in direct tax collections. Indirect tax collections are largely tracking the budget estimates. The widening in deficit was also contributed by pick up in revenue expenditures led by PM-KISAN transfers, clearance of fertiliser dues, front loaded MNREGA spending and higher transfers to states. Capex spending also continued to grow at a robust pace driven by upfronting of spending especially in railway and road sector.
| FYTD ending | Jul-22 | Jul-23 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 8,695 | 8,942 | 2.8% |
| Total Direct Tax | 4,383 | 4,333 | -1.1% |
| Total Indirect Tax | 4,312 | 4,609 | 6.9% |
| Less: Share of States & others | 2,032 | 3,116 | 53.3% |
| Net Tax collection | 6,662 | 5,826 | -12.6% |
| Non-Tax Revenue | 896 | 1,788 | 99.6% |
| Total Revenue Receipts | 7,558 | 7,614 | 0.7% |
| Total Capital Receipts | 301 | 137 | -54.5% |
| Total Receipts | 7,859 | 7,751 | -1.4% |
| Total Revenue Expenditures | 9,181 | 10,636 | 15.9% |
| Total Capital Expenditures | 2,087 | 3,171 | 52.0% |
| Total Expenditures | 11,267 | 13,807 | 22.5% |
| Gross Fiscal Deficit | -3,408 | -6,056 | 77.7% |
| Fiscal Deficit as % of GDP | -1.4% | -2.1% |
Source: CMIE
Going forward, given the reasonable budget estimates, we expect fiscal deficit to remain close to target. Higher outlay on fertiliser subsidy and shortfall in divestment receipts is likely to be offset by higher-than-expected dividend from RBI and PSUs. However, significant slowdown in tax collections in the event of growth moderation is a risk.
Retail inflation spikes, likely to remain elevated in the near term: CPI inflation in July 23 surged to 7.4% (June-23: 4.9%) driven by steep rise in food prices. While the surge in food prices was primarily driven by volatile components like vegetables, inflation of cereals and pulses also remained elevated. On the brighter side, core inflation continued to moderate and sequential momentum remained benign.
| YoY, % | Jun-23 | Jul-23 | Change |
|---|---|---|---|
| CPI | 4.9 | 7.4 | 2.5 |
| Food & Beverages | 4.7 | 10.6 | 5.9 |
| Fuel and Light | 3.9 | 3.7 | -0.2 |
| Housing | 4.6 | 4.5 | -0.1 |
| Transportation & communication | 2.5 | 2.4 | -0.1 |
| Core CPI@ | 6.2 | 5.7 | -0.4 |
Source: CMIE; @-CPI excluding food, fuel, housing and transportation & communication
The recent price trend suggests that tomato prices have plunged from their peak, however, its full impact should be visible in September 2023's inflation print only. Over the next couple of quarters, CPI is expected to moderate and remain within a range of 4-6% driven by lagged impact of tighter monetary policy, growth slowdown expectation and likelihood of benefits of commodity price correction being passed on to consumers in due course. However, rise in oil prices, weak sowing of pulses and sub-par monsoon along with resilient domestic demand poses upside risks.
Trade Deficit eases, likely to remain rangebound: Trade deficit increased in July 2023 due to rise in oil as well as net NONG imports. This was partly offset by lower gold imports. The increase in NONG imports was driven by increase in import of machinery as well as ferrous and non-ferrous commodities. Further, decline in electronics and textile exports also resulted in NONG deficit widening.
| Amount in USD billion | Jun-23 | Jul-23 | Change |
|---|---|---|---|
| Trade Deficit / (Surplus) | 18.8 | 20.7 | 1.9 |
| Net Oil Imports | 5.8 | 7.2 | 1.4 |
| Net Gold Imports* | 5.0 | 3.2 | (1.8) |
| NONG deficit | 8.0 | 10.3 | 2.3 |
Source: CMIE, Ministry of Commerce; *NONG includes net imports of gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery.
Slowdown in exports is likely to be higher relative to domestic demand which can keep trade deficit at similar levels. Further, the recent rise in oil prices can result in trade deficit widening but is expected to remain within reasonable range.
Commodity prices: Prices of most major commodities declined month on month on the back of lower-than-expected growth momentum in China. Crude oil prices rose on the back of continued production cuts by major oil producers.
| Market price (USD)* | Aug-23^ (%) | FYTD24& (%) | |
|---|---|---|---|
| Brent Crude (per barrel) | 86.9 | 1.5 | 8.9 |
| Gold (per ounce) | 1,940 | (1.3) | (1.5) |
| Steel (per tonne) | 555 | (1.8) | (15.3) |
| Zinc (per tonne) | 2,413 | (5.4) | (17.0) |
| Copper (per tonne) | 8,360 | (3.2) | (6.4) |
| Aluminium (per tonne) | 2,166 | (3.5) | (8.9) |
| Lead (per tonne) | 2,214 | 3.0 | 3.2 |
Source: Bloomberg; *Market prices as on August 31, 2023. ^M-o-M change. & - change during FY24
Summary and Conclusion:
Global growth indicators signal that incrementally growth is soening albeit at a gradual pace. Global growth is expected to slow down driven by tighter financial conditions, soening consumption momentum and declining consumer confidence. While expectations of a so landing in the US is increasing, growth disappointment in Eurozone and China is likely to drag down global growth including trade. While inflation has come off significantly in the past one year, the decline is a lot more gradual than expected. The recent uptick in food and commodity prices pose upside risk to inflation.
Indian economic activity has held steady, supported by resilient consumption demand and government led investment spending. Going forward, higher food inflation and lower rainfall will be key headwinds to consumption demand and can impact rural demand sentiments. While global trade is expected to slow down, trade deficit is expected to remain range bound. Moreover, current account is expected to improve sequentially in FY24 supported by resilient services exports. While capital flows remain uncertain in view of global monetary tightening, BoP is expected to remain within manageable levels given the adequate foreign exchange reserves. We remain optimistic on India's growth prospects on the back of resilient investment activities, steady consumption and reasonably strong external sector.
Over the medium term, Indian economy is likely to be supported by a favourable policy environment, impact of PLI schemes, opportunities arising from shi of global supply chain, Government thrust on infrastructure spending, etc. Further, strong increase in private sector capex announcement along with low leverage, rising capacity utilization, steady corporate profitability and robust balance sheet of the banking sector bode well for the overall growth.
