Market Review
Global growth softened driven by some moderation witnessed in the US while economic activity in Europe and China remained subdued. US labour market eased with Non-Farm Payroll (NFP) below expectations and unemployment rate inching up to 4.3%, a near 3 years high. Further, the housing and manufacturing sectors activity remained muted. On the flip side, US growth surprised on the upside for Q2CY24 led by resilient consumption. Further, monthly retail sales and activity in the services sector continued to be buoyant. China's growth moderated to 4.7% in Q2CY24, below market expectations. China's industrial profit remained steady while its real estate activity continues to reel under pressure. There are growing concerns over China not being able to achieve the 5% GDP growth target in CY24.
Inflation moved within a narrow range and largely on expected lines across most major economies. While most central banks maintained status quo on monetary policy, Bank of Japan indicated that it will continue to raise rates to achieve its inflation goal. On the other hand, US FOMC Chairperson Jerome Powell in his Jackson Hole speech indicated that it's “time to adjust the policy” and Fed is likely to tilt towards relatively easier monetary policy as the growth, labour market and inflation moves into better balance. Further, ECB is also expected to cut repo rate again in September 2024 in view of muted inflation.
India's GDP growth moderates, internals favourable: Q1FY25 GDP growth softened to 6.7% (4QFY24: 7.8%), lower than RBI estimate of 7.1%. However, internals were encouraging as reflected in healthy growth in both investments and consumption. Private consumption picked up possibly aided by revival in rural consumption. Further, investment (GFCF) growth remained robust supported by resilient private capex. Growth in exports outpaced the imports. Weak government consumption amid elections dragged down the growth to a certain extent.
On the production side, real GVA growth stood at 6.8% (4QFY24: 6.3%) supported by growth in industry led by electricity and construction while manufacturing growth remained healthy. Services sector growth was largely driven by public administration etc. (growing at 9.5%), despite weak government spending—reflecting robust spending by defense and other public sector entities. In line with firm private consumption, the trade, hotels, transport, etc. also grew at an improved pace. Agriculture sector growth remained sluggish at 2.0%, albeit better than last quarter, given the impact of the heatwave.
While the headline GDP growth remains lower than expected, internals were favourable. Growth is expected to pick up in view of likely pick up in government spending along with steady improvement in rural consumption in view of favourable monsoon. Urban consumption is likely to moderate and can marginally offset the impact.
Indian economic activity softens in Q2FY25: Indian economic activity moderated in recent months reflected in weakness in retail PV registration, freight tonnage movement, and higher unemployment (as per CMIE survey). CV and tractor retail sales along with power demand also contracted on YOY basis. However, some economic activity indicators held up well with manufacturing and services PMI remaining buoyant and 2W retail registration growing at a steady pace along with GST collections.
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. * based on CMIE survey
India's economic indicators have been mixed in recent months with some slowdown visible in select pockets. Overall, we expect growth to remain relatively better, albeit lower than last year.
Trade deficit widens, likely to remain range bound: Trade deficit rose in July 2024 primarily driven by rise in NONG imports. Higher electronics, vegetable oil and machinery imports resulted in NONG imports rising. Further, NONG exports declined slightly driven by engineering goods and chemicals. This was partly offset by lower oil imports.
The trade deficit is likely to remain within a similar range in view of resilient domestic demand, easing oil prices and expectations of pick up in exports on back of improvement in global trade. This along with potential healthy growth in services exports is likely to keep current account within manageable range in FY25.
Source: CMIE, Ministry of Commerce; *Net Gold includes gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery exports. ^NONG refers to Non-Oil Non-Gold (as defined above) imports/exports
Central government finances in a comfortable position: Fiscal deficit declined in 4MFY25 on back of robust growth in direct tax collections primarily driven by personal income tax. Non-tax receipt also rose on back of large increase in dividends from RBI. On the spending side, while capex picked up in July 2024, on FYTD basis it was down 17.6% on account of delay in spending due to elections. Revenue spending also remained muted.
Source: CMIE
While the fiscal deficit has been substantially low till July 2024, pick up in government spending is likely to normalise the same. Government announced the full budget for FY25 wherein it estimates the deficit to narrow to 4.9% (interim budget estimate: 5.1%) of GDP. The revenue and spending assumptions for FY25 appear realistic and achievable.
Retail inflation eased sharply, likely to remain range bound: India's July CPI eased to 3.5% YOY primarily driven by favourable base effect. Food and beverage inflation moderated in July 2024 driven by lower YoY vegetable inflation. On sequential basis, food prices, however, rose by 2.5% on back of 3.2% increase in June 2024. Transportation and communication rose on YoY basis due to increase in mobile tariffs by major telecom companies during the month. Core CPI remained benign.
Source: CMIE; @-CPI excluding food, fuel, transportation & housing
CPI is expected to remain range bound in near term aided by favourable base effects, benign input price pressure, arrival of new crops easing food inflation and sluggish core CPI momentum.
Commodity prices: Oil prices remained under pressure during the month, despite rise in geopolitical risks, driven by weak demand outlook for China and possibility of increase in oil production by OPEC+. Most industrial commodity prices increased during the month.
Source: Bloomberg; *Market prices as on August 31, 2024. ^M-o-M change. & - Change in FYTD25
Summary and Conclusion:
Global economic activity momentum continued to moderate after a subdued Q2CY24. The outlook on growth remains uncertain especially in view of ongoing weakness in the US labour market which has been the primary driver in sustaining global growth. Further, economic activity in China remains weak and impact of growth supportive measure has been relatively low till now.
India's growth, however, remains steady supported by buoyant manufacturing and service sectors. Above trend monsoon is supportive of agriculture activity and rural incomes. Investments remain supported by real estate activity, government capex spending and improvement in organised private corporate capex. Private corporate sector capital expenditure has potential to accelerate in view of low leverage, increasing capacity utilization, consistent corporate profitability, and a robust banking sector balance sheet. India's external sector also remains robust on the back of comfortable current account deficit and adequate forex reserves. Rise in geopolitical tension disrupting supply chains, sharp deceleration in global economic activity, etc. are key near-term risks.
Looking ahead, the medium-term outlook for India's economy appears optimistic. This optimism is fuelled by policy continuity, benefits from Production-Linked Incentive schemes, opportunities arising from shift in the global supply chain, enhanced infrastructure investments, the potential of resurgence in private sector capex, and the enduring robustness of consumption.
