Market Review
FY24 will be remembered as a year of resilience, with growth, inflation and labour market proving more robust/higher than expected at the start of the year. Despite predictions of a slowdown, global growth surpassed forecasts, mainly due to strong growth in the United States. The US economy stayed resilient thanks to increased government spending, a tight job market, rising wages, and positive wealth effect. Further, the manufacturing and housing sectors, which were under pressure during most part of the year, also showed signs of stabilization by Q4FY24. In contrast, Europe and the UK witnessed a slowdown in growth due to factors like war, high interest rates, elevated natural gas prices, and weaker consumer confidence. China, too, faced challenges despite an initial growth boost a er reopening, struggling due to deterioration in its real estate sector and so ening exports. However, robust consumption, especially services, healthy industrial investment and the government’s thrust on infrastructure helped to keep a floor on growth.
Growth disappointment in China led to commodity prices correcting during the year despite continuing wars, rising geopolitical uncertainty, Red Sea crisis and risk of supply chain disruptions. Further, rising interest rates and concerns about a future slowdown had a negative impact on commodity markets. Oil prices, however, rose towards the end of the year driven by robust demand, production cuts by OPEC+ and intensification of war between Ukraine and Russia. Notably, gold performed unexpectedly well compared to other commodities, breaking its usual pattern of moving opposite to the US dollar and stocks, as China emerged as a large buyer.
Inflation significantly receded from its peak 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, towards the end of the year, most central banks signaled the end of rate hikes in this cycle.
Key events of FY24
- Fitch Ratings lowered the US sovereign credit rating to AA+/Stable, while Moody's revised the outlook to Negative (although it reaffirmed the AAA rating). S&P maintained an AA+/Stable rating for the US.
- Hamas militants from the Gaza strip initiated an attack on Israel, leading to a conflict between Israel and Hamas.
- Both the US and European banking sectors encountered a crisis due to a series of bank collapses, prompting central banks to intervene and mitigate the resulting ripple effect.
- The Bank of Japan (BoJ) ceased its Negative Interest Rate Policy (NIRP) and Yield Curve Control (YCC), raising its policy rate to a range between 0-10 basis points.
- RBI surprised by pausing in April 2023 and has since maintained the status quo.
- JP Morgan announced the inclusion of India's Government Securities (Gsecs) in its Global Bond EM Indices, effective June 2024. Bloomberg also included Indian Gsecs in its EM Local Currency Government Index starting Jan-2025.
- Central government presented its “Vote on Account” budget for FY25. It targets to reduce its fiscal deficit to 5.1% of GDP (FY24RE: 5.8%) in FY25 and bring it down to <4.5% by FY26
GDP growth momentum sustained by Investment, private consumption subdued: India's growth momentum accelerated and GDP growth surpassed even the most optimistic forecasts, driven by robust growth in capital expenditure. The surge in investments was particularly supported by a resurgence in real estate activities and pick up in government's infrastructure spending. 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 activity decelerated as trade and hotels spending inched towards normalization.
| YoY, % | 9MFY23 | 9MFY24 | YoY, % | 9MFY23 | 9MFY24 |
|---|---|---|---|---|---|
| GDP | 7.3 | 8.2 | GVA | 6.6 | 7.4 |
| Private Consumption | 8.7 | 3.7 | Agriculture, Forestry and Fishing | 3.1 | 3.7 |
| Government Consumption | 6.9 | 3.2 | Industry | 2.2 | 8.5 |
| Gross Capital Formation | 6.4 | 10.1 | Manufacturing | -1.5 | 7.8 |
| Gross Fixed Capital Formation | 7.8 | 10.2 | Construction | 8.5 | 10.7 |
| Services | 10.2 | 7.8 | |||
| Exports | 13.8 | 0.8 | Trade, Hotels, Transport, etc. | 12.3 | 7.7 |
| Imports | 14.7 | 11.8 | PADO | 11.2 | 6.3 |
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 led by robust real estate activities.
Economic activity moderates but remains resilient: Current economic indicators in India continue to exhibit resilience, as evident from robust growth in power demand, 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 moderation in 2W sales growth along with decline in retail sales of commercial vehicle (CV), passenger vehicle (PV), and tractors.
| Indicators | Units | Jul-23 | Aug-23 | Sep-23 | Oct-23 | Nov-23 | Dec-23 | Jan-24 | Feb-24 | Mar-24 |
|---|---|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | ||||||||||
| 2W | YoY, % | 8.5 | 6.6 | 21.9 | -12.6 | 21.5 | 27.5 | 15.4 | 13.5 | 5.3 |
| PV | 5.7 | 8.3 | 19.0 | -2.0 | 19.7 | 2.1 | 15.8 | 14.4 | -6.4 | |
| MHCV | 5.4 | 8.1 | 7.7 | 17.9 | -2.0 | -0.4 | 2.3 | -3.5 | -16.0 | |
| LCV | -5.4 | -1.3 | -3.3 | 2.4 | -9.1 | -4.4 | -4.0 | -1.5 | -8.1 | |
| Tractors | 25.1 | 16.5 | -7.3 | 3.5 | -22.3 | 1.4 | 24.0 | 12.8 | -1.9 | |
| Gross GST Collection | 10.8 | 10.8 | 10.2 | 13.4 | 15.1 | 10.3 | 11.7 | 12.5 | 11.5 | |
| Average E-Way bill generated | 16.4 | 19.5 | 9.5 | 30.5 | 8.5 | 13.2 | 16.4 | 14.8 | NA | |
| Power demand | 8.0 | 16.3 | 10.3 | 20.9 | 6.1 | 1.6 | 6.1 | 4.7 | 9.1 | |
| Digital Spending (UPI + IMPS) & | 35.7 | 37.7 | 32.8 | 34.4 | 38.3 | 35.3 | 35.5 | 40.6 | 33.5 | |
| Railway Freight Tonnage | 1.5 | 6.4 | 6.8 | 8.5 | 4.3 | 6.4 | 6.4 | 10.1 | 9.5 | |
| Railway Freight Earnings | 3.2 | 2.7 | 5.1 | 6.6 | 3.8 | 3.6 | 4.1 | 9.0 | NA | |
| Manufacturing PMI^ | Index | 57.7 | 58.6 | 57.5 | 55.5 | 56.0 | 54.9 | 56.5 | 56.9 | 59.1 |
| Services PMI^ | Index | 62.3 | 60.1 | 61.0 | 58.4 | 56.9 | 59.0 | 61.8 | 60.6 | 61.2 |
| Unemployment | % | 7.9 | 8.1 | 7.3 | 9.4 | 8.9 | 8.7 | 6.8 | 8.0 | 7.6 |
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
Central government finances in a comfortable position: Revenue collections surprised on the upside in FY24 led by robust growth in both personal and corporate tax. Indirect tax collections, however, remained sluggish. While GST collections continue to grow at a healthy pace, excise collections were subdued on back of reduction in windfall taxes levied on Oil & Gas sector. The non-tax receipts were healthy driven by higher than expected dividends from the Reserve Bank of India (RBI) and Public Sector Undertakings (PSUs). Nevertheless, the government is likely to miss its divestment target as progress remains lacklustre. The government has exercised significant restraint over revenue spending which has grown only marginally compared to last year. More importantly, government 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) | Feb-23 | Feb-24 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 25,473 | 28,899 | 13.4% |
| Total Direct Tax | 12,874 | 15,651 | 21.6% |
| Total Indirect Tax | 12,599 | 13,248 | 5.1% |
| Less: Share of States & others | 8,151 | 10,404 | 27.6% |
| Net Tax collection | 17,322 | 18,495 | 6.8% |
| Non-Tax Revenue | 2,486 | 3,603 | 44.9% |
| Total Revenue Receipts | 19,808 | 22,098 | 11.6% |
| Total Capital Receipts | 589 | 361 | -38.6% |
| Total Receipts | 20,397 | 22,459 | 10.1% |
| Total Revenue Expenditures | 29,034 | 29,417 | 1.3% |
| Total Capital Expenditures | 5,902 | 8,056 | 36.5% |
| Total Expenditures | 34,936 | 37,473 | 7.3% |
| Gross Fiscal Deficit | -14,539 | -15,014 | 3.3% |
| Fiscal Deficit as % of GDP | -5.4% | -5.1% |
Source: CMIE
The center is likely to meet its revised fiscal deficit target of 5.8% of GDP in FY24 as buoyant revenue collections and higher than anticipated dividends from PSUs are likely to offset the drag of lower indirect tax collection and shortfall in divestment proceeds. For FY25, in view of realistic assumptions, the budgeted deficit of 5.1% of GDP seems achievable.
Retail inflation cools down but remains elevated: Consumer Price Index (CPI) eased in FY24 primarily driven by broad based improvement in inflation of non-food component of CPI and favourable base effect. Food inflation remained persistently high, propelled by increased prices of vegetables, fruits, pulses, and cereals. Fuel and light inflation were driven by the government's reduction in LPG prices and subdued firewood chips prices. Year-on-year, transportation and communication inflation remained low due to a base effect and the absence of any changes in retail auto fuel prices throughout the year. While Core CPI also eased, it remained at an elevated level driven by increase in personal effects, education, and healthcare services inflation.
| Average (YoY, %) | FY23 | 11MFY24 | Change in % |
|---|---|---|---|
| CPI | 6.7 | 5.4 | -1.3 |
| Food & Beverages | 6.7 | 7.0 | 0.3 |
| Fuel and Light | 10.4 | 1.7 | -8.7 |
| Housing | 4.3 | 4.0 | -0.3 |
| Transportation & communication | 5.9 | 2.0 | -4.0 |
| Core CPI@ | 6.7 | 5.3 | -1.5 |
While uncertainty regarding food inflation remains, the momentum of core Consumer Price Index (CPI) has considerably eased in the second half of FY24. The correction in commodity prices has also restrained rise of consumer prices. Given the favorable base and the subdued momentum in core CPI, inflation is anticipated to average around 4.5% in FY25 (Source: RBI).
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 FY24, primarily attributable to a sustained growth in services exports and fall in commodity prices, particularly in oil, coal, and fertilizers. Rise in gold prices led to higher net gold imports. The growth in services exports was driven by resilient software services and robust growth in professional and other management services led by global capability centres (GCC). 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) were weak, 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) | 9MFY23 | 9MFY24 | Change |
|---|---|---|---|
| Trade (Deficit) / Surplus | (213) | (193) | 20 |
| Net Oil Imports | (85) | (68) | 17 |
| Net Gold Imports^ | (28) | (31) | (3) |
| Trade deficit ex oil & gold (NONG) | (100) | (93) | 7 |
| Net Invisibles exports Surplus / (Deficit) | 147 | 162 | 15 |
| Current account deficit | (66) | (31) | 35 |
| % of GDP | (2.6) | (1.2) | |
| Capital Account Surplus / (Deficit) | 51 | 64 | 13 |
| FDI | 22 | 8 | (14) |
| FII | (3) | 33 | 36 |
| NRI deposits | 5 | 9 | 4 |
| Trade credits, ECBs, etc. | 1 | (3) | (4) |
| Banking capital | 20 | 24 | 4 |
| Others | 6 | (7) | (13) |
| Balance of Payments | (15) | 33 | 48 |
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
Current account is expected to stay within manageable levels in FY25, bolstered by the resilience of services exports. Additionally, the capital flows are expected to improve on back of potential inflows resulting from India's Government Securities (Gsec) inclusion in JP Morgan global bond indices and a likely improvement in 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 metal prices in FY24. Oil prices which remained largely rangebound during most part of the year, rose in the last quarter amidst ongoing production cuts by OPEC+, intensification of war between Ukraine and Russia, lower inventories, and robust demand offsetting higher-than-anticipated non-OPEC oil supply. Rising expectations of rate cuts along with rise in geopolitical risks and China emerging as large buyer of gold resulted in gold prices surging.
| YoY Change | Market price (USD)* | FY23 (%) | FY24 (%) |
|---|---|---|---|
| Brent Crude (per barrel) | 87 | -26.1 | 9.7 |
| Gold (per ounce) | 2,230 | 1.6 | 13.2 |
| Steel (per tonne) | 510 | -21.6 | -22.1 |
| Zinc (per tonne) | 2,391 | -31.8 | -17.7 |
| Copper (per tonne) | 8,729 | -13.6 | -2.3 |
| Aluminium (per tonne) | 2,295 | -31.7 | -3.4 |
| Lead (per tonne) | 1,965 | -11.8 | -8.4 |
Source: Bloomberg; *Market prices as on March 31, 2024.
Summary and Conclusion
Contrary to expectations of a slowdown, growth was surprisingly resilient and better than expected in FY24, particularly in the United States. The tight labour market, accumulated savings and large wealth effect aided the growth momentum. Consequently, monetary policy tightened further across the AEs and rate cut expectations were pushed out. 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 thrust on capital expenditure, and strong corporate profitability. Growth prospects for the upcoming year are expected to be sustained, propelled by a possible recovery in the rural sector, ongoing emphasis on capital expenditure, and easing inflation. The Reserve Bank of India (RBI) maintained the repo rate throughout the year but drained out liquidity pushing Weighted Average Call Rate (WACR) higher than repo rate in H2FY24. 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.
