Market Review
CY23 was a year full of surprises, mostly positive ones. Contrary to expectations of an economic slowdown, global growth exceeded projections, primarily propelled by the resilient performance of the United States economy. The robustness of the US was fueled by widening of government fiscal deficit, a tight labor market, rising wages, and positive wealth effects. Conversely, Europe and the UK experienced a dampening effect on growth due to the impact of war, elevated interest rates, increased natural gas prices, and weakened consumer sentiments. In China, despite an initial growth rebound following reopening, the economy encountered challenges, grappling with a sluggish real estate sector and decelerating exports. Elevated interest rates and concerns about an impending slowdown in the following year negatively affected commodity markets. Notably, gold defied the broader commodity downturn, deviating from its customary inverse correlation with the USD and equities.
Inflation significantly receded from its peak in CY23 across most Advanced Economies (AEs), driven by corrections in food, energy, and commodity prices. Although core inflation trended downward, it still remained relatively elevated, consistently above central banks' targets throughout the year. Consequently, major central banks maintained a stance of tight monetary policy. However, by the end of the year, it appeared that most central banks have largely reached the end of rate hike cycle.
Key events of 2023
Fitch Ratings downgraded the US sovereign credit rating to AA+/Stable, while Moody's revised the outlook to Negative (rating reaffirmed at AAA). S&P maintains an outstanding rating of AA+/Stable for the US.
An attack on Israel was launched by Hamas militants from the Gaza strip, resulting in a war between Israel and Hamas.
The US and European banking sector faced a crisis with a series of bank collapses, prompting central banks to intervene and mitigate the ripple effect.
The Bank of Japan (BoJ) relaxed the band of Yield Curve Control (YCC) from (+/-) 25 bps to (+/-) 50 bps, with an unchanged target at 0%.
Income from the sale of debt mutual fund units to be taxed as Short-Term Capital Gains (STCG), and the indexation benefit removed.
Income from non-Unit Linked Insurance Plan (ULIP) insurance policies with a total premium exceeding INR 5 lakhs per annum is now taxable.
RBI surprised by pausing in April 2023 against market expectations; drained out liquidity to keep monetary policy tight India's Government Securities (Gsecs) have been included in JP Morgan Global Bond Indices, effective June 2024.
GDP growth momentum sustained by Investment, private consumption subdued: India's economic expansion exceeded even the most optimistic forecasts, driven by robust growth in capital expenditure. The surge in investments was particularly supported by the government's emphasis on infrastructure development and a resurgence in real estate activities. Although private consumption saw only modest growth supported by urban demand, the rural sector faced challenges due to the uneven monsoon and elevated food inflation, resulting in subdued rural income. Gross Value Added (GVA) witnessed significant growth, primarily fueled by robust manufacturing and construction activities. However, the services sector experienced a deceleration as spending in areas such as trade and hotels normalized.
| YoY, % | 9MCY22 | 9MCY23 | Quarter ended YoY, % | 9MCY22 | 9MCY23 |
|---|---|---|---|---|---|
| GDP | 7.5 | 7.1 | GVA | 6.9 | 7.2 |
| Private Consumption | 10.4 | 3.9 | Agriculture, Forestry and Fishing | 3.0 | 3.6 |
| Government Consumption | 3.7 | 4.0 | Industry | 3.6 | 8.2 |
| Gross Capital Formation | 9.3 | 8.3 | Manufacturing | 0.8 | 7.6 |
| Gross Fixed Capital Formation | 11.1 | 9.3 | Construction | 8.3 | 10.5 |
| Services | 10.0 | 7.6 | |||
| Exports | 17.8 | 2.8 | Trade, Hotels, Transport, etc. | 14.1 | 7.5 |
| Imports | 20.4 | 10.8 | PADO | 10.0 | 6.2 |
Source- CMIE, MoSPI, Ambit Capital research. Note – PADO: Public Administration, Defence & Other Services 2) GFCF- Gross Fixed capital Formation
Going forward, India's growth is expected to remain steady supported by likely revival in rural sector and continuance of investment spending.
Economic activity moderates but remains resilient: Current economic indicators in India continue to exhibit resilience, as evident from robust growth in two-wheeler retail registrations, GST collections, digital spending, railway freight tonnage, a robust manufacturing Purchasing Managers' Index (PMI), and a declining trend in unemployment. Nonetheless, certain segments are experiencing a slowdown, as indicated by a decline in retail sales of commercial vehicle (CV), passenger vehicle (PV), and tractors. Additionally, power demand growth has moderated a er showing strong expansion in the preceding months.
| Indicators | Units | Apr-23 | May-23 | Jun-23 | Jul-23 | Aug-23 | Sep-23 | Oct-23 | Nov-23 | Dec-23 |
|---|---|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | ||||||||||
| 2W | YoY, % | -7.0 | 9.6 | 7.1 | 8.5 | 6.6 | 21.9 | -12.6 | 21.5 | 27.5 |
| PV | 0.6 | 6.3 | 6.6 | 5.7 | 8.3 | 19.0 | -2.0 | 19.7 | 2.1 | |
| MHCV | 10.3 | 11.0 | 0.9 | 5.4 | 8.1 | 7.7 | 17.9 | -2.0 | -0.4 | |
| LCV | -4.4 | 2.4 | -4.7 | -5.4 | -1.3 | -3.3 | 2.4 | -9.1 | -4.4 | |
| Tractors | 1.8 | 10.3 | 43.1 | 25.1 | 16.5 | -7.3 | 3.5 | -22.3 | 1.4 | |
| Gross GST Collection | 11.6 | 11.5 | 11.7 | 10.8 | 10.8 | 10.2 | 13.4 | 15.1 | 10.3 | |
| Average E-Way bill generated | 12.2 | 19.7 | 15.5 | 16.4 | 19.5 | 9.5 | 30.5 | 8.5 | ||
| Power demand | -1.8 | -0.4 | 4.3 | 8.0 | 16.3 | 10.3 | 20.9 | 6.1 | 1.6 | |
| Digital Spending& | 35.6 | 35.0 | 35.5 | 35.7 | 37.7 | 32.8 | 34.4 | 38.3 | 35.3 | |
| Railway Freight Tonnage | 3.5 | 1.9 | -1.9 | 1.5 | 6.4 | 6.8 | 8.5 | 4.3 | 6.4 | |
| Railway Freight Earnings | 6.8 | 4.0 | -1.0 | 3.2 | 2.7 | 5.1 | 6.6 | 3.8 | 3.6 | |
| Manufacturing PMI^ | Index | 57.2 | 58.7 | 57.8 | 57.7 | 58.6 | 57.5 | 55.5 | 56.0 | 54.9 |
| Services PMI^ | Index | 62.0 | 61.2 | 58.5 | 62.3 | 60.1 | 61.0 | 58.4 | 56.9 | 59.0 |
| Unemployment | % | 8.5 | 7.6 | 8.5 | 7.9 | 8.1 | 7.1 | 10.1 | 9.2 | 8.7 |
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. &- Sum of UPI+IMPS spending
Government finances in a comfortable position: Following a subdued beginning in FY24, there was a notable upturn in direct tax collections. Moreover, non-tax receipts, including dividends from the Reserve Bank of India (RBI) and Public Sector Undertakings (PSUs), exceeded expectations. Reduction in windfall taxes levied on Oil & Gas sector during last year, resulted in a moderation of excise duties; however, robust GST collections have maintained the resilience of indirect tax collections, albeit falling slightly short of the budget estimate. Nevertheless, the government is likely to miss its divestment target as progress on this front remains lacklustre. The government has exercised control over revenue spending and strategically front-loaded capital spending to stimulate growth, with the railway and road sectors emerging as primary beneficiaries of this spending.
| FYTD ending (INR billion) | Nov-22 | Nov-23 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 17,807 | 20,420 | 14.7% |
| Total Direct Tax | 8,668 | 10,818 | 24.8% |
| Total Indirect Tax | 9,138 | 9,602 | 5.1% |
| Less: Share of States & others | 5,558 | 6,063 | 9.1% |
| Net Tax collection | 12,248 | 14,358 | 17.2% |
| Non-Tax Revenue | 1,983 | 2,844 | 43.4% |
| Total Revenue Receipts | 14,232 | 17,201 | 20.9% |
| Total Capital Receipts | 415 | 255 | -38.6% |
| Total Receipts | 14,646 | 17,456 | 19.2% |
| Total Revenue Expenditures | 19,957 | 20,665 | 3.6% |
| Total Capital Expenditures | 4,471 | 5,856 | 31.0% |
| Total Expenditures | 24,428 | 26,522 | 8.6% |
| Gross Fiscal Deficit | -9,782 | -9,066 | -7.3% |
| Fiscal Deficit as % of GDP | -3.8% | -3.1% |
Source: CMIE
In FY24, the government is anticipated to meet the budgeted fiscal deficit target of 5.9% of GDP, propelled by direct tax collections and dividend receipts that have exceeded expectations. These sources of revenue are expected to adequately offset the impact of lower divestment receipts, subdued excise duty collections, and increased expenditure due to the extension of the free food grain scheme and fertiliser subsidy.
Retail inflation cools down but remains elevated: Consumer Price Index (CPI) witnessed only a marginal easing in CY23, despite a higher base, primarily influenced by elevated levels of both food and core inflation. Food inflation remained persistently high, propelled by increased prices of vegetables, fruits, pulses, and cereals. The moderation in fuel and light inflation was driven by the government's reduction in LPG prices and subdued firewood chips prices. Year-onyear, transportation and communication inflation remained low due to a Source: CMIE; @-CPI excluding food, fuel, transportation & housing high base effect and the absence of any changes in retail auto fuel prices throughout the year. Core CPI, however, maintained its elevated status, primarily driven by increases in personal effects, education, and healthcare services.
| Average (YoY, %) | CY22 | 11MCY23 | Change in % |
|---|---|---|---|
| CPI | 6.7 | 5.7 | -0.1 |
| Food & Beverages | 6.8 | 6.4 | -0.4 |
| Fuel and Light | 10.0 | 4.6 | -5.4 |
| Housing | 4.0 | 4.4 | 0.4 |
| Transportation & communication | 7.0 | 2.6 | -4.4 |
| Core CPI@ | 6.6 | 6.0 | -0.6 |
Source: CMIE; @-CPI excluding food, fuel, transportation & housing
While uncertainty regarding food inflation remains, the momentum of core Consumer Price Index (CPI) has considerably eased in the second half of CY23. The correction in commodity prices has restrained consumer prices. Given the favorable base and the subdued momentum in core CPI, the average inflation is anticipated to hover around 4.5% over the next 12-15 months.
Current account deficit narrows significantly, likely to remain in manageable range: India's Current Account Deficit (CAD) witnessed a significant decline in the first nine months of CY22, primarily attributable to a substantial fall in commodity prices, particularly in oil, coal, and fertilizers. Despite an increase in gold prices, gold imports declined due to a decrease in volumes. Despite cutbacks or postponements in spending amid fears of a slowdown, net exports of IT services, management & professional services, and research & development remained robust. However, heightened global uncertainties and increased outflows, particularly through exits via Initial Public Offerings (IPOs), resulted in a sharp decline in India's net Foreign Direct Investment (FDI) inflows. Furthermore, interest rate-sensitive inflows such as trade credit and External Commercial Borrowings (ECBs) remained subdued, reflecting the elevated global interest rate environment. Nevertheless, buoyant Foreign Portfolio Investment (FPI) flows in both equity and debt sectors neutralized the overall impact.
| India’s external situation (USD billion) | 9MCY22 | 9MCY23 | Change |
|---|---|---|---|
| Trade (Deficit) / (Surplus) | (212.7) | (170.2) | 42.5 |
| Net Oil Imports | (85.1) | (69.2) | 15.9 |
| Net Gold Imports^ | (28.0) | (24.4) | 3.6 |
| Trade deficit ex oil & gold (NONG) | (99.6) | (76.7) | 23.0 |
| Net Invisibles exports Surplus / (Deficit) | 147.1 | 151.4 | 4.4 |
| Current account deficit | (65.6) | (18.8) | 46.8 |
| % of GDP | -2.6% | -0.7% | |
| Capital Account Surplus / (Deficit) | 50.9 | 51.3 | 0.4 |
| FDI | 21.6 | 11.1 | (10.5) |
| FII | (3.5) | 19.0 | 22.5 |
| NRI deposits, External assistance etc. | 9.2 | 13.0 | 3.8 |
| Trade credits, ECBs, etc. | 1.4 | 2.7 | 1.2 |
| Banking capital | 20.3 | 4.1 | (16.2) |
| Others | 1.9 | 1.5 | (0.4) |
| Balance of Payments | (14.7) | 32.5 | 47.2 |
Source: CMIE, Ministry of Commerce; NM – Not meaningful. ^ 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
Looking ahead, the current account is anticipated to stay within manageable levels, bolstered by the resilience of services exports. Additionally, the capital account is expected to receive support from potential inflows resulting from India's Government Securities (Gsec) inclusion in JP Morgan bond indices and a likely improvement in Foreign Direct Investment (FDI) flows.
Commodity prices continue to fall: The underwhelming growth in China, coupled with challenges in its real estate sector, and subdued global demand for goods in Advanced Economies (AEs), contributed to a moderation in commodity prices in CY23. Despite sanctions on Russia, the emergence of new geopolitical crises in the Middle East, and ongoing production cuts by OPEC+, oil prices contracted due to higher-than-anticipated non-OPEC oil supply and tepid demand. Anticipation of a growth slowdown and the likelihood of an earlier-thanexpected easing in monetary policy resulted in rise in gold prices.
| YoY Change | Market price (USD)* | CY22 (%) | CY23 (%) |
|---|---|---|---|
| Brent Crude (per barrel) | 77 | 10.5 | -10.3 |
| Gold (per ounce) | 2,063 | -0.3 | 13.1 |
| Steel (per tonne) | 570 | -23.0 | -2.6 |
| Zinc (per tonne) | 2,641 | -16.7 | -12.7 |
| Copper (per tonne) | 8,476 | -13.5 | 1.1 |
| Aluminium (per tonne) | 2,346 | -16.3 | -0.2 |
| Lead (per tonne) | 2,031 | 0.3 | -13.0 |
Source: Bloomberg; *Market prices as on December 31, 2023.
Summary and Conclusion:
Contrary to expectations of a slowdown, CY23 witnessed notable growth resilience, particularly in the United States. Advanced Economies (AEs) underwent an unprecedented pace of monetary tightening amid persistent inflation. Nevertheless, the impact was cushioned by a tight labour market, accumulated savings, and the wealth effect. In contrast, China's economic activity faced challenges as the real estate sector continued to struggle despite multiple rounds of supportive measures.
In India, the growth momentum remained robust, supported by buoyant economic activity, a thriving housing market, government capital expenditure, and strong corporate profitability. The Reserve Bank of India (RBI) responded by implementing rapid rate hikes and liquidity draining measures. Growth prospects for the upcoming year are expected to be sustained, propelled by a recovery in the rural sector, ongoing emphasis on capital expenditure, and easing inflation. While the external sector is modestly vulnerable due to elevated global interest rates, it remains well-protected by comfortable foreign exchange reserves and a manageable current account. Key risks to this outlook include the escalation of geopolitical tensions, a resurgence of inflation, tightening measures by major central banks, and a sharp rise in energy prices.
