Market Review
The global economy showed signs of slowdown in November 2023. The so ness in US economic growth was reflected in labour market cooling and subdued housing as well as manufacturing activity. However, consumption in the US continues to hold up well supported by low unemployment rate and steady wage growth. Broad based weakness was visible in the Eurozone with manufacturing as well as the services sector decelerating. The tight monetary policy, low consumer confidence, extended war, slowing global trade, etc. have weighed on sentiments and growth. Chinese economic recovery remained fragile with exports falling, modest growth in industrial profits, near neutral PMIs and continuing weakness in real estate sector. China's regulatory authorities are increasingly rolling out targeted growth measures and its impact should be visible in coming quarters.
Inflation trended lower across major economies with both headline and core inflation so ening. The Core Inflation, while still higher than prepandemic levels, the trajectory is comforting for Central bankers in AEs.
India Q2FY24 GDP grows at an impressive 7.6% YoY: GDP growth in Q2FY24 was higher than market expectations as industrial growth surprised on the upside, led by manufacturing and construction sectors. Erratic rainfall led to moderation in agricultural sector activities while lower consumption led to moderation of services sector growth. On the demand side, investment growth continued its impressive run led by strong Government and Household investment spending. However, private consumption is moderating possibly due to elevated price levels, uneven recovery and subdued rural environment.
| Quarter ended (YoY, %) | Jun-23 | Sep-23 | Quarter ended (YoY, %) | Jun-23 | Sep-23 |
|---|---|---|---|---|---|
| GDP | 7.8 | 7.6 | GVA | 7.8 | 7.4 |
| Private Consumption | 6.0 | 3.1 | Agriculture, Forestry and Fishing | 3.5 | 1.2 |
| Government Consumption | -0.7 | 12.4 | Industry | 5.5 | 13.2 |
| Gross Capital Formation | 7.1 | 9.9 | Manufacturing | 4.7 | 13.9 |
| Gross Fixed Capital Formation | 8.0 | 11.0 | Construction | 7.9 | 13.3 |
| Services | 10.3 | 5.8 | |||
| Exports | -7.7 | 4.3 | Trade, Hotels, Transport, etc. | 9.2 | 4.3 |
| Imports | 10.1 | 16.7 | PADO | 7.9 | 7.6 |
Source : CEIC, MoSPI, Ambit Capital research. Note – PADO: Public Administration, Defence & Other Services 2) GFCF- Gross Fixed capital Formation
Indian economic activity remains steady: India's growth momentum is holding up well reflecting in healthy growth in high frequency indicators. PMIs, digital spending, GST collections, 2W and 4W registration, power demand, etc. grew at robust pace. However, some moderation was visible in indicators like tractor sales, railway tonnage movement etc. and unemployment (as per CMIE survey) remained high.
| Indicators | Units | Mar-23 | Apr-23 | May-23 | Jun-23 | Jul-23 | Aug-23 | Sep-23 | Oct-23 | Nov-23 |
|---|---|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | ||||||||||
| 2W | YoY, % | 12.8 | -7.0 | 9.6 | 7.1 | 8.5 | 6.6 | 21.9 | -12.6 | 21.1 |
| PV | 15.2 | 0.6 | 6.3 | 6.6 | 5.7 | 8.3 | 19.0 | -2.0 | 16.8 | |
| MHCV | 23.7 | 10.3 | 11.0 | 0.9 | 5.4 | 8.1 | 7.7 | 17.9 | -2.4 | |
| LCV | 0.6 | -4.4 | 2.4 | -4.7 | -5.4 | -1.3 | -3.3 | 2.4 | -9.4 | |
| Tractors | 7.0 | 1.8 | 10.3 | 43.1 | 25.1 | 16.5 | -7.3 | 3.5 | -22.2 | |
| Gross GST Collection | 12.7 | 11.6 | 11.5 | 11.7 | 10.8 | 10.8 | 10.2 | 13.4 | 15.1 | |
| Average E-Way bill generated | 16.3 | 12.2 | 19.7 | 15.5 | 16.4 | 19.5 | 9.5 | 30.5 | 8.5 | |
| Power demand | -2.1 | -1.8 | -0.4 | 4.3 | 8.0 | 16.3 | 10.3 | 20.9 | 6.1 | |
| Digital Spending& | 37.5 | 35.6 | 35.0 | 35.5 | 35.7 | 37.7 | 32.8 | 34.4 | 38.3 | |
| Railway Freight Tonnage | 3.8 | 3.5 | 1.9 | -1.9 | 1.5 | 6.4 | 6.8 | 8.5 | 4.3 | |
| Railway Freight Earnings | 10.5 | 6.8 | 4.0 | -1.0 | 3.2 | 2.7 | 5.1 | 6.6 | 3.8 | |
| Manufacturing PMI^ | Index | 56.4 | 57.2 | 58.7 | 57.8 | 57.7 | 58.6 | 57.5 | 55.5 | 56.0 |
| Services PMI^ | Index | 57.8 | 62.0 | 61.2 | 58.5 | 62.3 | 60.1 | 61.0 | 58.4 | 56.9 |
| Unemployment | % | 8.1 | 8.5 | 7.6 | 8.5 | 7.9 | 8.1 | 7.1 | 10.1 | 9.2 |
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
India's growth momentum is likely to remain steady on back of robust industrial activity and urban consumption. However, spatial and temporal distribution of monsoon and its impact on crop yields may weigh on rural consumption.
Robust direct tax collections keep fiscal deficit on track to achieve BE target: Gross tax revenues moderated in October 2023 but on FYTD basis, the revenue collections remain strong led by robust direct tax collections. Indirect tax collections, however, grew modestly as reduction in windfall taxes on oil led to fall in excise duty collections. Spending grew at healthy pace led by capex spending on railways, roads and interest free capex loans to states.
| FYTD ending (INR billion) | Oct-22 | Oct-23 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 16,096 | 18,345 | 14.0% |
| Total Direct Tax | 8,082 | 10,032 | 24.1% |
| Total Indirect Tax | 8,014 | 8,313 | 3.7% |
| Less: Share of States & others | 4,385 | 5,326 | 21.5% |
| Net Tax collection | 11,711 | 13,020 | 11.2% |
| Non-Tax Revenue | 1,788 | 2,658 | 48.7% |
| Total Revenue Receipts | 13,499 | 15,677 | 16.1% |
| Total Capital Receipts | 357 | 230 | -35.6% |
| Total Receipts | 13,856 | 15,907 | 14.8% |
| Total Revenue Expenditures | 17,347 | 18,475 | 6.5% |
| Total Capital Expenditures | 4,090 | 5,469 | 33.7% |
| Total Expenditures | 21,437 | 23,944 | 11.7% |
| Gross Fiscal Deficit | -7,581 | -8,037 | 6.0% |
| Fiscal Deficit as % of GDP | -3.0% | -2.8% |
Source: CMIE
Better than expected direct tax collections and non-tax revenues (mainly RBI and PSU dividends) are likely to make up for likely shortfall in divestment receipts and indirect tax collections. Further, the spending is largely on track to achieve budget estimate. Hence, we expect fiscal deficit for FY24 to remain close to budget.
Retail inflation moderate further, vegetable prices likely to push it up in the near term: CPI inflation moderated marginally in October 2023 as vegetable prices cooled down led by tomato and potato prices. On the other hand, Cereals, pulses and fruit inflation continues to remain elevated. While LPG subsidy helped moderate fuel inflation, rise in electricity prices offset the impact to a certain extent. Housing inflation surprised on the downside. Core CPI trended lower aided by favorable base and slowing price momentum as input prices eased.
| YoY, % | Sep-23 | Oct-23 | Change |
|---|---|---|---|
| CPI | 5.0 | 4.9 | -0.2 |
| Food & Beverages | 6.3 | 6.2 | -0.1 |
| Fuel and Light | -0.1 | -0.4 | -0.3 |
| Housing | 4.0 | 3.8 | -0.2 |
| Transportation & communication | 2.3 | 2.0 | -0.3 |
| Core CPI@ | 5.3 | 5.1 | -0.2 |
Source: CMIE; @-CPI excluding food, fuel, transportation & housing
The price of select vegetables like tomato, onion, etc. has shot up in recent weeks and is likely to push up headline inflation. However, the core inflation is likely to remain rangebound as momentum remains subdued.
Trade Deficit widens sharply, likely to remain elevated: Trade deficit widened considerably in October 2023 as imports rose on back of festive season demand. Gold imports rose sharply on back of higher volume and price while net oil imports expanded due to rise in crude oil prices. Higher imports of coal, fertilisers, machinery, etc. led to NONG imports rising month on month. This together with lower external demand resulting in exports
slowing down and hence, widening of NONG deficit.
In the near term, while the trade deficit is likely to moderate from hereon, resilient domestic demand is likely to keep imports high. Further, the export demand is likely to remain subdued and thus, trade deficit can remain at elevated level.
| Amount in USD billion | Sep-23 | Oct-23 | Change |
|---|---|---|---|
| Trade Deficit / (Surplus) | 19.4 | 31.5 | 62.4% |
| Net Oil Imports | 7.5 | 11.7 | 55.5% |
| Net Gold^ Imports | 3.1 | 7.5 | 143.0% |
| NONG* net imports | 8.8 | 12.3 | 39.8% |
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
Commodity prices: Reduction in escalation in war between Israel-Hamas, demand uncertainty in China and Europe and better than expected oil inventories led to moderation in oil prices. Metal prices remained flattish as major economies such as China and USA both witnessed so manufacturing activities. Moderation in dollar index, US treasury yields and rising consensus that US policy rates have peaked led to rally in gold prices.
| Market price (USD)* | Mov-23^ (%) | FYTD24& (%) | |
|---|---|---|---|
| Brent Crude (per barrel) | 82.8 | (5.2) | 3.8 |
| Gold (per ounce) | 2,037 | 2.7 | 3.4 |
| Steel (per tonne) | 540 | 2.9 | (17.6) |
| Zinc (per tonne) | 2,478 | 1.9 | (14.7) |
| Copper (per tonne) | 8,332 | 3.7 | (6.7) |
| Aluminium (per tonne) | 2,156 | (3.8) | (9.3) |
| Lead (per tonne) | 2,112 | 0.1 | (1.5) |
Source: *Market prices as on November 30, 2023. ^M-o-M change. & - change during FY24
Summary and Conclusion:
Global growth momentum moderated across major economies including US, Europe and China. The narrative of so landing is increasingly becoming consensus for the US economy as inflation is trending lower while economic activity and labour market are still in good shape. Eurozone economic activity remains subdued with weak PMIs, low consumer confidence and tight monetary policy. Chinese economic recovery remains fragile and data indicates a mixed picture. While industrial activity and infrastructure investments remains relatively better, real estate and consumption remains muted.
India's GDP growth came in stronger than expected on back of resilient investment and government spending. The growth momentum is steady supported by urban consumption. Easing inflation, resilient services sector, healthy urban consumption, etc. are likely to support the momentum in the near term. Risks to this view are possible impact of uneven rainfall on Kharif crop yields which can derail rural recovery. Investment activity remains supported by both centre and states governments front loading the capex spending and household real estate activity holding up well. Private capex remains relatively so but can pick up as conditions remain conducive given the low leverage, rising capacity utilization, steady corporate profitability and robust balance sheet of the banking sector. The external sector is well placed with current account expected to improved YoY. While capital flows remain uncertain in view of global monetary tightening, BoP is expected to remain within manageable levels and INR stable.
Over the medium term, we remain optimistic on Indian economy in view of the favourable policy environment, positive impact of PLI schemes, opportunities arising from shi of global supply chain, Government thrust on infrastructure spending, possibility of private sector capex recovery, personal consumption holding up well, etc.
