Market Review
Global growth presented a mixed picture. In US, GDP growth for Q1CY23 was revised up and labour market continues to remain tight with both job openings and payroll addition surprising on the upside. Further, services sector and retail spending continue to hold up well and there are some signs of housing activity bottoming out too supported by fall in yields. However, manufacturing sector remained weak and lending standards tightened further. In EA, while services spending and labour market remained strong, the manufacturing sector continues to remain under pressure and consumer confidence weak. In China, economic activity indicators point at slowing growth momentum with credit growth, industrial production, industrial profits, PMIs, etc. being lower than forecasted. Inflation eased in US and EA but was still above the comfort levels of central banks. ECB also raised the rates by 25 bps to 3.75% and indicated the need to continue raising rates to tame inflation. However, US FOMC minutes signalled possibility of pause to assess the impact of already done policy tightening.
India's GDP growth beats estimates, recovery in consumption and global headwinds key to sustaining: GDP growth increased by 6.1% against a consensus estimate of ~5% supported by resilient investment spending and improvement in net exports. Pickup in investment activities was supported by government spending along with private sector. Private consumption remained weak possibly led by so ness in rural demand and discretionary spending as pent up demand wanes. On the GVA side, services sector continued to remain robust led by continued improvement in travel, hotels, etc. Construction activities grew at healthy pace and manufacturing sector witnessed a significant improvement too.
| Quarter ended (YoY, %) | Dec-22 | Mar-23 | Quarter ended (YoY, %) | Dec-22 | Mar-23 | |
|---|---|---|---|---|---|---|
| GDP | 4.5 | 6.1 | GVA | 4.7 | 6.5 | |
| Private Consumption | 2.2 | 2.8 | Agriculture, Forestry and Fishing | 4.7 | 5.5 | |
| Government Consumption | -0.6 | 2.3 | Industry | 2.3 | 6.3 | |
| Gross Capital Formation | 5.2 | 7.8 | Manufacturing | -1.4 | 4.5 | |
| Gross Fixed capital formation | 8.0 | 8.9 | Construction | 8.3 | 10.4 | |
| Services | 6.1 | 6.9 | ||||
| Exports | 11.1 | 11.9 | Trade, Hotels, Transport, etc. | 9.6 | 9.1 | |
| Imports | 10.7 | 4.9 | PADO | 2.0 | 3.1 |
PADO – Public administration, Defence and other services, Source: CMIE
Growth is likely to moderate in FY24 as the impact of favorable base effect wanes and demand normalises. The growth outlook is dependent on recovery of private consumption and investment demand sustaining. Relative to other major economies, we remain optimistic about India's growth as economic indicators continue to remain resilient and impact of supportive fiscal policies like PLI schemes, push on infrastructure, etc. should help too. Moderation in global growth and potential impact of El Niño can act as headwinds for India.
Indian economic activity remained robust: The high frequency indicators indicated a mixed picture in May 2023 with industrial activity growth moderating reflected in indicators like freight tonnage, power demand, etc. although manufacturing PMI, GST collections and E-way bills growth trended higher. Consumption remained resilient indicated in strong retail spending and retail auto registration which grew at a healthy pace.
| Indicators | Units | Mar-22 | Jun-22 | Sep-22 | Dec-22 | Mar-23 | Apr-23 | May-23 |
|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | ||||||||
| 2W | YoY, % | -2.8 | 20.2 | 16.7 | -1.3 | 25.1 | 3.2 | 22.1 |
| PV | -3.5 | 33.6 | 12.0 | 14.7 | 21.3 | 5.7 | 13.0 | |
| MHCV | 18.0 | 91.9 | 29.6 | 20.9 | 25.8 | 13.0 | 14.7 | |
| LCV | 8.1 | 62.4 | 15.8 | 8.1 | 4.8 | -0.1 | 7.6 | |
| Tractors | -5.3 | 11.9 | 4.9 | 27.8 | 30.5 | 14.8 | 34.8 | |
| Gross GST Collection | 14.7 | 55.8 | 26.2 | 15.2 | 12.7 | 11.6 | 11.5 | |
| Average E-Way bill generated | 9.7 | 36.2 | 23.7 | 17.5 | 16.3 | 12.2 | 19.7 | |
| Power demand | 5.9 | 16.2 | 11.3 | 9.8 | -2.1 | -1.8 | -0.4 | |
| Retail Spending | 71.0 | 75.4 | 60.6 | 44.6 | 37.5 | 35.6 | 35.0 | |
| Railway Freight Tonnage | 6.7 | 11.3 | 9.1 | 3.1 | 3.8 | 3.5 | 1.7 | |
| Railway Freight Earnings | 10.7 | 20.1 | 14.0 | 12.9 | 10.5 | 6.8 | 1.6 | |
| Manufacturing PMI^ | Index | 54.0 | 53.9 | 55.1 | 57.8 | 56.4 | 57.2 | 58.7 |
| Services PMI^ | Index | 53.6 | 59.2 | 54.3 | 58.5 | 57.8 | 62.0 | 61.2 |
| Unemployment | % | 7.6 | 7.8 | 6.4 | 8.3 | 8.1 | 8.5 | 7.7 |
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.
Overall, India's economic activity is likely to remain resilient supported by buoyant services sector and steady investment activities. However, the so ness in global growth is likely to weigh on growth over the coming quarters.
Retail inflation eases, likely to trend lower in the near term: CPI inflation in April 2023 moderated sharply to 4.7% (March 2023: 5.7%), its lowest print in last 18 months. Moderation in prices was led by favorable base and lower vegetables and edible oil & fats inflation. So er electricity and traditional cooking fuels prices helped in easing of fuel & light inflation. While core inflation continues to remain elevated on YoY basis, the momentum decelerated significantly.
| YoY, % | Mar-23 | Apr-23 | Change |
|---|---|---|---|
| CPI | 5.7 | 4.7 | -1.0 |
| Food & Beverages | 5.1 | 4.2 | -0.9 |
| Fuel and Light | 8.8 | 5.5 | -3.3 |
| Housing | 5.0 | 4.9 | -0.1 |
| Transportation & communication | 4.0 | 1.2 | -2.8 |
| Core CPI@ | 6.5 | 6.2 | -0.3 |
The CPI is likely to cool down going forward supported by favorable base effect, slowing inflation momentum and pass on benefits of correction in commodity Source: CMIE; @-CPI excluding food, fuel, housing and transportation & prices to consumers. However, impact of potential El-Nino on crop production and communication resilient demand are key upside risks to CPI outlook.
Fiscal deficit in line with RE, low risk of fiscal slippage in FY24: Robust tax collections along with disciplined spending by central government helped the fiscal deficit to remain in line with the revised estimates for FY23. While tax collections were close to estimates, non-tax revenues were better than estimated led by higher interest and dividend receipts. However, the capital receipts were lower driven by shortfall in divestment receipts. Government capex spending was slightly higher than estimated while revenue spending was largely in line.
| INR bn | FY21 | FY22 | FY23 | YoY growth | 2 Year CAGR | 3 Year CAGR | |
|---|---|---|---|---|---|---|---|
| Gross tax revenue | 20,249 | 27,083 | 30,538 | 12.8% | 22.8% | 15.0% | |
| Total Direct Tax | 9,264 | 13,854 | 16,341 | 17.9% | 32.8% | 16.4% | |
| Total Indirect Tax | 10,984 | 13,228 | 14,197 | 7.3% | 13.7% | 13.4% | |
| Less: Share of States & others | 6,008 | 8,879 | 9,564 | 7.7% | 26.2% | 13.5% | |
| Net Tax collection | 14,240 | 18,204 | 20,974 | 15.2% | 21.4% | 15.7% | |
| Non-Tax Revenue | 2,076 | 3,480 | -17.8% | 17.4% | -4.4% | ||
| Total Revenue Receipts | 16,339 | 21,684 | 23,835 | 9.9% | 20.8% | 12.3% | |
| Total Capital Receipts | 576 | 392 | 722 | 84.1% | 11.9% | 1.7% | |
| Total Receipts | 16,915 | 22,076 | 24,557 | 11.2% | 20.5% | 11.9% | |
| Total Revenue Expenditures | 30,843 | 32,014 | 34,525 | 7.8% | 5.8% | 13.7% | |
| Total Capital Expenditures | 4,256 | 5,928 | 7,363 | 24.2% | 31.5% | 29.9% | |
| Total Expenditures | 35,098 | 37,942 | 41,888 | 10.4% | 9.2% | 16.0% | |
| Gross Fiscal Deficit | -18,183 | -15,865 | -17,331 | 9.2% | -2.4% | 22.9% | |
| Fiscal Deficit as % of GDP | -9.2% | -6.8% | -6.4% |
Source: CMIE
While this is only the first month, we expect government fiscal deficit is likely to be contained and close to FY24BE. While possibility of fertiliser subsidy exceeding target and divestment receipts falling short of estimates, it should be partly offset by higher-than-expected dividend from RBI and PSU banks.
Trade Deficit rises, likely to worsen in the near term: Trade deficit narrowed to ~USD 15 billion in April 2023 driven by fall in gold imports along with lower net petroleum imports. Net NONG trade deficit was largely stable on back of decline in both imports and exports mainly driven by fall in volumes. NONG imports contracted led by sequential decrease in edible oil, electronic goods, transport equipment and metalliferous ores. On the other hand, decline in NONG exports was driven by reduction in exports of engineering goods, electronics, chemicals and yarns.
| Amount in USD billion | Mar-23 | Apr-23 | Change (MoM, %) |
|---|---|---|---|
| Trade Deficit / (Surplus) | 18.6 | 15.2 | -18.3% |
| Net Oil Imports | 9.7 | 8.7 | -10.5% |
| Net Gold Imports* | 3.6 | 0.8 | -77.9% |
| NONG deficit | 5.3 | 5.7 | 8.5% |
Source: CMIE, Ministry of Commerce; *NONG includes net imports of gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery.
Going forward, trade deficit is likely to be within reasonable range as impact of exports moderation is likely to be partly offset by slowdown in domestic demand, lower oil prices and correction in commodity prices.
Commodity prices: Weakness in global demand along with uncertainties surrounding US Debt Ceiling talks and further liquidity tightening by major central banks led to oil prices falling by 8.6% in May 2023. Metal prices further cooled down as China, the largest importer of commodities, reported weak economic data especially relating to manufacturing and investments activities.
| Market price (USD)* | MAY-23 (%) | FYTD24^ (%) | |
|---|---|---|---|
| Brent Crude (per barrel) | 72.7 | (8.6) | (8.9) |
| Gold (per ounce) | 1,963 | (1.4) | (0.3) |
| Steel (per tonne) | 545 | (9.2) | (16.8) |
| Zinc (per tonne) | 2,228 | (16.9) | (23.3) |
| Copper (per tonne) | 8,017 | (6.5) | (10.3) |
| Aluminium (per tonne) | 2,287 | (3.4) | (3.8) |
| Lead (per tonne) | 2,036 | (5.9) | (5.1) |
Source: Bloomberg; *Market prices as on May 31, 2023. ^M-o-M change. &
- change during FY24
Summary and Conclusion:
Global growth is holding up well led by services sector and tight labour markets across most major countries. However, elevated interest rate and modest goods demand is likely to keep housing and manufacturing activity muted. Further, while the inflation has come off from the peak, it remained at elevated levels. While major central banks are close to peak rate, the rates can remain at elevated levels for longer period than what market is anticipating.
Indian economic activity remained resilient supported by services sector and urban demand. Further, trade deficit narrowed in view of correction in commodity prices which lowered imports and steady NONG exports. We remain optimistic on India's growth prospects on the back of resilient investment activities, correction in commodity prices and supportive fiscal policies, although lagging consumption remains a risk. Current account is expected to improve too in FY24 supported by improvement in services exports and low oil prices. While capital flows remain uncertain in view of global monetary tightening, BoP is expected to remain within manageable levels.
Over the medium term, Indian economy is likely to be supported by favourable policy environment, impact of PLI schemes, opportunities arising from shi of global supply chain, Government thrust on infrastructure spending, etc. Further, strong increase in private sector capex announcement along with low leverage, rising capacity utilization, steady corporate profitability and robust balance sheet of banking sector bode well for the overall growth outlook.
