Market Review
Global data continued to present a mixed picture on growth. In US, housing starts and construction spending witnessed improvement and services PMI remained in expansionary territory along with continued tight labour market. On the other hand, retail spending growth moderated driven by the rise in borrowing cost and manufacturing PMI slipped further into the contractionary territory. Eurozone saw so ness in business activities as services PMI eased while manufacturing PMI further moderated. In China, economic activity indicators point at slowing growth momentum with credit growth, industrial profits, PMIs, unemployment, etc. being weaker than expectations. Headline inflation moderated across major economies driven by a favourable base and decline in food and energy prices. However, core inflation in AEs remained higher than the comfort level of central banks. US FOMC decided to keep the rates unchanged in its June 2023 meeting but revised its Summary of Economic Projections (SEP) to reflect expectations of two more rate hikes in 2023. Consensus estimates suggest another rate hike to continue in US, Eurozone and UK.
Indian economic activity eases but still steady: The high frequency indicators indicated an opposing picture for June 2023. While indicators like power demand, manufacturing PMI, retail spending, tractor sales, GST collections, etc. grew at healthy pace, select indicators like CV, PV and 2W retail registrations, railway freight tonnage, unemployment, etc. deteriorated or remained muted during the month.
| Indicators | Units | Nov-22 | Dec-22 | Jan-23 | Feb-23 | Mar-23 | Apr-23 | May-23 | Jun-23 |
|---|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | |||||||||
| 2W | YoY, % | 15.8 | -12.9 | 10.0 | 14.8 | 12.4 | -7.3 | 9.4 | 6.8 |
| PV | 13.6 | 4.2 | 20.0 | 8.3 | 9.7 | -4.8 | 1.1 | 0.7 | |
| MHCV | 44.6 | 17.5 | 17.5 | 18.8 | 19.9 | 8.8 | 10.2 | 1.0 | |
| LCV | 25.0 | 5.5 | 11.5 | 11.2 | -0.8 | -5.3 | 2.4 | -3.5 | |
| Tractors | 44.0 | 4.1 | 9.6 | 16.6 | 7.2 | 2.0 | 10.2 | 42.7 | |
| Gross GST Collection | 10.9 | 15.2 | 12.7 | 12.4 | 12.7 | 11.6 | 11.5 | 11.7 | |
| Average E-Way bill generated | 32.0 | 17.5 | 19.7 | 18.4 | 16.3 | 12.2 | 19.7 | 15.5 | |
| Power demand | 12.3 | 9.8 | 12.0 | 7.7 | -2.1 | -1.8 | -0.4 | 4.3 | |
| Retail Spending (UPI + IMPS) | 45.2 | 44.6 | 45.7 | 40.7 | 37.5 | 35.6 | 35.0 | 35.5 | |
| Railway Freight Tonnage | 5.4 | 3.1 | 3.9 | 3.6 | 3.8 | 3.5 | 1.9 | -0.9 | |
| Railway Freight Earnings | 11.1 | 12.9 | 13.2 | 11.8 | 10.5 | 6.8 | 4.0 | -1.7 | |
| Manufacturing PMI^ | Index | 55.7 | 57.8 | 55.4 | 55.3 | 56.4 | 57.2 | 58.7 | 57.8 |
| Services PMI^ | Index | 56.4 | 58.5 | 57.2 | 59.4 | 57.8 | 62.0 | 61.2 | 58.5 |
| Unemployment | % | 8.0 | 8.3 | 7.1 | 7.5 | 8.1 | 8.5 | 7.7 | 8.5 |
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.
Overall, India's economic activity is holding up better than most other major countries. Going forward, growth momentum is expected to moderate in view of global slowdown, rise in interest rates and so ening in pent up demand.
India's Current Account Deficit (CAD) narrows down: CAD narrowed sharply in Q4FY23 on account of lower trade deficit driven by correction in commodity prices especially oil, fertilisers and coal and exports outpacing imports. Further, invisible exports remained resilient supported by strong services exports led by IT and other business services along with improvement in tourism and remittances. On the capital account side, net selling by FPIs was offset by improvement in FDI and ECB inflows.
On an annual basis, CAD widened to 2% in FY23 (FY22: 1.2%) on the back of sharp increase in trade deficit driven by rise in energy especially oil and coal and elevated fertilisers prices. Further, the resilient domestic demand and slowing global trade also impacted adversely. Capital account surplus narrowed on the back of lower FDI, ECB and trade credit (due to higher interest rate environment globally) which resulted in balance of payment turning negative in FY23.
| India’s external situation (USD bn) | Q3FY23 | Q4FY23 | FY22 | FY23 | |
|---|---|---|---|---|---|
| Trade (Deficit) / Surplus | -71.3 | -52.6 | (189.5) | (265.3) | |
| Net Oil Imports | -29.3 | -27.0 | (94.3) | (112.0) | |
| Net Gold Imports* | -7.6 | -5.0 | (41.4) | (33.1) | |
| Trade deficit ex oil & gold | -34.5 | -20.6 | (53.8) | (120.2) | |
| Net Invisibles exports Surplus / (Deficit) | 54.5 | 51.3 | 150.8 | 198.3 | |
| Current account Surplus / (deficit) | -16.8 | -1.3 | (38.7) | (67.0) | |
| % of GDP | -2.0% | -0.2% | -1.2% | -2.0% | |
| Capital Account Surplus / (Deficit) | 27.9 | 6.9 | 86.2 | 57.8 | |
| FDI | 2.0 | 6.4 | 38.6 | 28.0 | |
| FII | 4.6 | -1.7 | (16.8) | (5.2) | |
| ECBs, Assistance, etc. | 1.7 | 6.9 | 16.7 | 10.7 | |
| Trade credits | 1.5 | -0.3 | 20.1 | 6.5 | |
| Banking capital | 12.0 | -7.7 | 3.9 | 12.6 | |
| Others | 6.1 | 3.3 | 23.7 | 5.2 | |
| Balance of Payments | 11.1 | 5.6 | 47.5 | (9.1) |
* Source- CEIC, RBI, Ambit Capital research
Retail inflation eases, likely to trend lower in the near term: CPI inflation in May 2023 moderated further to 4.3%, its lowest print since Apr'21, mainly led by favorable base and lower YOY prices in vegetables and edible oil & fats. So er traditional cooking fuels and firewood prices resulted in fuel & light inflation easing. Core CPI remains elevated driven by resilient inflation in clothing & footwear, personal effects, health and household goods & services.
| YoY, % | Apr-23 | May-23 | Change |
|---|---|---|---|
| CPI | 4.7 | 4.3 | -0.5 |
| Food & Beverages | 4.2 | 3.3 | -0.9 |
| Fuel and Light | 5.5 | 4.6 | -0.9 |
| Housing | 4.9 | 4.8 | -0.1 |
| Transportation & communication | 1.2 | 1.1 | -0.1 |
| Core CPI@ | 6.3 | 6.4 | 0.1 |
Source: CMIE; @-CPI excluding food, fuel, housing and transportation & communication
The recent rise in vegetable prices especially tomatoes is likely to result in CPI inching up higher in the near term. Over the medium term, CPI is expected to Source: CMIE; @-CPI excluding food, fuel, housing and transportation & remain rangebound driven by favourable base effect, so ening growth, lagged communication
impact of tighter monetary policy and likelihood of benefits of commodity price correction being passed on to consumers in due course. However, the potential impact of El-Nino on crop production and resilient domestic demand poses key upside risks to CPI outlook.
Fiscal deficit in line with last year, low risk of fiscal slippage: Tax collections were lower than last year in the first 2 months of FY24 driven by lower corporate tax and union excise duty collections. However, personal tax collection grew at a healthy pace. Non-tax revenues jumped on the back of rise in RBI dividend. On the expenditure side, capital spending grew at a strong pace with higher allocation towards road and rail sector along with equity infusion in government owned telecommunication company. However, centre maintained a tight leash on revenue spending and revenue spending (ex of subsidy and interest) declined by 13% YoY in 2MFYTD24.
| FYTD ending | May-22 | May-23 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 4,035 | 3,970 | -1.6% |
| Total Direct Tax | 1,916 | 1,838 | -4.0% |
| Total Indirect Tax | 2,120 | 2,131 | 0.5% |
| Less: Share of States & others | 959 | 1,189 | 24.0% |
| Net Tax collection | 3,076 | 2,780 | -9.6% |
| Non-Tax Revenue | 493 | 1,347 | 173.4% |
| Total Revenue Receipts | 3,568 | 4,127 | 15.7% |
| Capital Receipts | 250 | 30 | -88.0% |
| Total Receipts | 3,819 | 4,157 | 8.9% |
| Revenue Expenditures | 4,787 | 4,582 | -4.3% |
| Capital Expenditures | 1,071 | 1,678 | 56.7% |
| Total Expenditures | 5,858 | 6,260 | 6.9% |
| Gross Fiscal Deficit | -2,039 | -2,103 | 3.1% |
| Fiscal Deficit as % of GDP | -0.8% | -0.8% |
Source: CMIE
While the figures are available only for first two months, we expect government fiscal deficit to be contained and close to FY24BE. Higher outlay on fertiliser subsidy and shortfall in divestment receipts is likely to be offset by higher-than-expected dividend from RBI and PSUs. The slowdown in tax collections in the event of growth moderation is the key risk to fiscal deficit.
Summary and Conclusion:
| Amount in USD billion | Apr-23 | May-23 | Change |
|---|---|---|---|
| Trade Deficit / (Surplus) | 15.2 | 22.1 | 6.9 |
| Net Oil Imports | 8.7 | 9.7 | 1.0 |
| Net Gold Imports* | 0.8 | 2.8 | 2.0 |
| NONG deficit | 5.7 | 9.7 | 3.9 |
Source: CMIE, Ministry of Commerce; NM – Not meaningful. *NONG includes net imports of gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery.
Trade Deficit rises, likely to worsen in the near term: Trade deficit widened to ~USD22 billion in May 2023 primarily driven by higher NONG net imports and higher gold imports. Higher NONG imports was led by commodities such as chemicals, ores & minerals, transport equipment and textiles saw higher imports while exports were largely unchanged month on month.
Exports are expected to moderate on global trade slowdown while domestic demand is likely to remain relatively robust. However, correction in commodity prices especially oil could keep the trade deficit within reasonable range.
Commodity prices: While weakness in demand weighed on oil prices, OPEC's decision to extend its oil supply cut agreement till 2024 and Saudi Arabia's decision to further cut its own supply by 1mbpd for the month of July 2023 led to oil prices increasing in June'23. Prices of most major industrial commodities rose sequentially, despite weakness in economic activity in China, on expectations of stimulus from China's regulatory authorities.
| Market price (USD)* | Jun-23^ (%) | FYTD24& (%) | |
|---|---|---|---|
| Brent Crude (per barrel) | 74.9 | 3.1 | (6.1) |
| Gold (per ounce) | 1,919 | (2.2) | (2.5) |
| Steel (per tonne) | 550 | 0.9 | (16.0) |
| Zinc (per tonne) | 2,363 | 6.1 | (18.7) |
| Copper (per tonne) | 8,210 | 2.4 | (8.1) |
| Aluminium (per tonne) | 2,111 | (7.7) | (11.2) |
| Lead (per tonne) | 2,105 | 3.4 | (1.9) |
Source: Bloomberg; *Market prices as on June 30, 2023. ^M-o-M change. & - change during FY24
Summary and Conclusion:
Global growth trend remained mixed with economic activity supported by steady improvement in services sector and tight labour markets across most major economies. While US activity remains better than expected, Eurozone, UK and China data surprised on the downside. Elevated interest rate and modest demand outlook for goods is likely to keep housing and manufacturing activity muted. Overall, global growth is expected to slow down driven by tighter financial conditions and losing consumption momentum. While headline inflation has cooled down, core inflation continues to remain at elevated levels. The current market expectation is that central banks in major AEs have some way to cover before they reach peak rate and the rates can stay at an elevated level for longer than earlier anticipated.
Indian economic activity showed some signs of easing during the month but is still better than most other economies. The recovery in services sector continued unabated led by hospitality sector and resilient urban consumption. Trade deficit widened on the back of resilient demand keeping moderation in imports lower than exports. 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 low oil prices and resilient services exports. While capital flows remain uncertain in view of global monetary tightening, BoP is expected to remain within manageable levels.
Over the medium term, the 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, improvement in private sector capex announcement along with low corporate leverage, rising capacity utilization, steady profitability and robust balance sheet of banking sector bode well for the overall growth outlook.
