Market Review
Global growth remained resilient in the face of a significant global monetary policy tightening and elevated, although moderating, inflation. The resilience is driven by accumulated savings, strong labour market, steady wage growth and pent up demand lasting longer than anticipated. Services continued to outperform manufacturing sector globally. In US, services PMI, resilient retail spending and low unemployment rate have increased the expectations of achieving “so landing”. However, manufacturing and housing sector activity remained benign but are off their bottom. Eurozone data remains mixed with consumer confidence, factory output and key surveys pointing at weakness in growth while retail sales, excess accumulated savings and labour market reflecting underlying resilience. In China, economic activity indicators point at slowing growth momentum with credit growth, industrial profits, PMIs, youth unemployment, etc. being weaker than expectations. Realising the need to support growth, Chinese regulatory authorities have announced measure to support real estate and consumption recently and can take further steps in this direction.
Fall in food and energy prices along with favourable base has resulted in headline CPI easing across major economies. Further, core inflation has eased too but still remains at elevated levels. In July, US, ECB and BoE raised rates in line with expectations, however, BoJ surprised the market by defacto changing the YCC reference range to +/-1% from +/- 0.5% by announcing that +/-0.5% are reference range and yields may be allowed to move in the range of +/-1%.
Indian economic activity eases but still steady: High frequency indicators continued to show a mixed picture. While indicators like power demand, manufacturing PMI, retail spending, tractor and 2W retail sales, GST collections, etc. grew at healthy pace, select indicators like CV and PV registrations, railway tonnage movement, unemployment, etc. deteriorated or remained muted during the month.
| Indicators | Units | Dec-22 | Jan-23 | Feb-23 | Mar-23 | Apr-23 | May-23 | Jun-23 | Jul-23 |
|---|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | |||||||||
| 2W | YoY, % | -12.9 | 10.0 | 14.8 | 12.4 | -7.3 | 9.4 | 6.8 | 8.2 |
| PV | 4.2 | 20.0 | 8.3 | 9.7 | -4.8 | 1.1 | 0.7 | -0.7 | |
| MHCV | 17.5 | 17.5 | 18.8 | 19.9 | 8.8 | 10.2 | 1.0 | 5.7 | |
| LCV | 5.5 | 11.5 | 11.2 | -0.8 | -5.3 | 2.4 | -3.5 | -3.1 | |
| Tractors | 4.1 | 9.6 | 16.6 | 7.2 | 2.0 | 10.2 | 42.7 | 25.2 | |
| Gross GST Collection | 15.2 | 12.7 | 12.4 | 12.7 | 11.6 | 11.5 | 11.7 | 10.8 | |
| Average E-Way bill generated | 17.5 | 19.7 | 18.4 | 16.3 | 12.2 | 19.7 | 15.5 | 16.4 | |
| Power demand | 9.8 | 12.0 | 7.7 | -2.1 | -1.8 | -0.4 | 4.3 | 8.0 | |
| Retail Spending (UPI + IMPS) | 44.6 | 45.7 | 40.7 | 37.5 | 35.6 | 35.0 | 35.5 | 35.7 | |
| Railway Freight Tonnage | 3.1 | 3.9 | 3.6 | 3.8 | 3.5 | 1.9 | -1.9 | 1.3 | |
| Railway Freight Earnings | 12.9 | 13.2 | 11.8 | 10.5 | 6.8 | 4.0 | -1.0 | 0.6 | |
| Manufacturing PMI^ | Index | 57.8 | 55.4 | 55.3 | 56.4 | 57.2 | 58.7 | 57.8 | 57.7 |
| Services PMI^ | Index | 58.5 | 57.2 | 59.4 | 57.8 | 62.0 | 61.2 | 58.5 | 62.3 |
| Unemployment | % | 8.3 | 7.1 | 7.5 | 8.1 | 8.5 | 7.7 | 8.5 | 8.0 |
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.
India's economic activity is holding up well although some so ness is visible in select segments. Going forward, growth momentum is expected to moderate in view of global slowdown, rise in interest rates and so ening in pent up demand.
Retail inflation rises, likely to increase further in the near term: CPI inflation in June 2023 inched up to 4.8% (May-23: 4.3%) driven by rise in food prices. Food prices were pushed upwards by vegetable prices, especially tomato, along with elevated cereals and pulses inflation. Cereals and pulses saw disruption in supply due to pre-monsoon showers and uneven rainfall. So er motor fuel & traditional cooking fuels prices helped in easing fuel & light inflation. Core CPI eased due to favourable base effect and some so ening of inflation in household goods & services. However, personal care, education and healthcare inflation remains high.
| YoY, % | May-23 | Jun-23 | Change |
|---|---|---|---|
| CPI | 4.3 | 4.8 | 0.5 |
| Food & Beverages | 3.3 | 4.6 | 1.3 |
| Fuel and Light | 4.7 | 3.9 | -0.8 |
| Housing | 4.8 | 4.6 | -0.3 |
| Transportation & communication | 1.1 | 2.5 | 1.4 |
| Core CPI@ | 6.5 | 6.0 | -0.5 |
Source: CMIE; @-CPI excluding food, fuel, housing and transportation & communication
The recent rise in vegetable prices, especially tomatoes, is likely to result in CPI rising in the near term. However, given the short cycle nature of the crops, it should ease in 2 or 3 months. However, this is likely to result in average inflation estimate being revised higher for FY24. Over the medium term, CPI is expected to remain rangebound and lower than RBI upper bound of target range (6%) driven by lagged impact of tighter monetary policy, slowing growth and likelihood of benefits of commodity price correction being passed on to consumers in due course. Further, favourable progress of monsoon in July should also ease concerns on kharif crop production. However, rise in oil prices, weak sowing of pulses and re-acceleration of El-Nino along with resilient domestic demand poses upside risks.
Fiscal deficit under control driven by lower revenue spending: Fiscal deficit as a % of GDP rose to 1.6% in Q1FY24, slightly higher than previous year driven by lower corporate tax and excise duty collections along with front loading of transfers to states. GST and personal tax collections remained in line or better than budget estimates. Centre's capex continues to grow at a robust pace led by higher spend on roads and railway although it maintained a tight leash on revenue spending (ex of subsidy and interest) which declined by ~7% YoY.
| FYTD ending | Jun-22 | Jun-23 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 6,505 | 6,719 | 3.3% |
| Total Direct Tax | 3,335 | 3,302 | -1.0% |
| Total Indirect Tax | 3,170 | 3,416 | 7.8% |
| Less: Share of States & others | 1,446 | 2,383 | 64.8% |
| Net Tax collection | 5,059 | 4,336 | -14.3% |
| Non-Tax Revenue | 622 | 1,550 | 149.3% |
| Total Revenue Receipts | 5,681 | 5,886 | 3.6% |
| Capital Receipts | 280 | 107 | -61.8% |
| Total Receipts | 5,960 | 5,993 | 0.5% |
| Revenue Expenditures | 7,728 | 7,722 | -0.1% |
| Capital Expenditures | 1,751 | 2,785 | 59.1% |
| Total Expenditures | 9,479 | 10,507 | 10.8% |
| Gross Fiscal Deficit | -3,519 | -4,514 | 28.3% |
| Fiscal Deficit as % of GDP | -1.4% | -1.6% |
Source: CMIE
Going forward, given the reasonable budget estimates, large slippage in fiscal deficit target is not envisaged. 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 the key risk to fiscal deficit.
Trade deficit eases, likely to remain rangebound: Trade deficit narrowed to ~USD18.8 billion in June 2023 primarily driven by reduction in net oil imports and easing of NONG trade deficit. This was partly offset by a rise in net gold imports on back of higher gold prices. The decline in NONG deficit was driven by a fall in import of coal and metals along with decline in machinery imports. This was partly offset by lower engineering goods exports.
| Amount in USD billion | May-23 | Jun-23 | Change |
|---|---|---|---|
| Trade Deficit / (Surplus) | 22.1 | 18.8 | 3.2 |
| Net Oil Imports | 9.7 | 5.8 | 3.9 |
| Net Gold Imports* | 2.8 | 5.0 | -2.2 |
| NONG deficit | 9.6 | 8.0 | 1.6 |
Source: CMIE, Ministry of Commerce; *NONG includes net imports of gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery.
Exports are expected to moderate on global trade slowdown while domestic demand is likely to remain relatively steady. Further, the recent rise in commodity prices especially oil can result in trade deficit rising but is expected to remain within reasonable range.
Commodity prices: Prices of most major commodities rose sequentially driven by optimism around China likely to unveil stimulus measures to support growth.
| Market price (USD)* | Jul-23^ (%) | FYTD24& (%) | |
|---|---|---|---|
| Brent Crude (per barrel) | 85.6 | 14.2 | 7.3 |
| Gold (per ounce) | 1,965 | 2.4 | (0.2) |
| Steel (per tonne) | 565 | 2.7 | (13.7) |
| Zinc (per tonne) | 2,550 | 7.9 | (12.3) |
| Copper (per tonne) | 8,636 | 5.2 | (3.4) |
| Aluminium (per tonne) | 2,245 | 6.4 | (5.6) |
| Lead (per tonne) | 2,150 | 2.1 | 0.2 |
Source: Bloomberg; *Market prices as on July 31, 2023. ^M-o-M change. & - change during FY24
Summary and Conclusion:
Global growth is holding up better than expected despite underwhelming manufacturing activity. Services sector growth continues to remain buoyant supported by accumulated savings, tight labour markets and inflation easing in most major countries. Going forward, lagged impact of rate hikes and waning accumulated savings is likely to result in global growth slowing albeit gradually. However, robust wage growth and elevated core inflation is likely to keep the rates at elevated levels for longer.
Indian economic activity remained resilient although some economic activity showed signs of easing during the month. The recovery in services sector continued, led by hospitality sector and resilient urban consumption. Trade deficit narrowed as a fall in commodity prices resulted in imports easing. We remain optimistic on India's growth prospects on the back of resilient investment activities, correction in commodity prices and supportive fiscal policies along with recovery in consumption. Current account is expected to improve too in FY24 supported by relatively low oil prices and steady services exports. While outlook on capital flows remain uncertain in view of global monetary tightening, BoP is expected to remain within manageable levels.
The Indian economy is well placed to grow at steady pace over the medium term 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, improvement in private sector capex announcement along with low corporate leverage, rising capacity utilization, steady profitability and robust balance sheet of banking sector also bode well for the overall growth outlook.
