Market Review
Global economic activity indicators continued to show a mixed picture. In the US, labour market conditions remained tight with initial jobless claims low and Non-farm payroll data surprising on the upside along with low unemployment rate of 3.8%. The manufacturing and housing sector activities showed signs of bottoming out with increase in factory orders and PMI, retail sales and rise in home prices. Services activity, however, witnessed deceleration month-on-month and consumer confidence dropped. On the other hand, Europe's factory activities continue to remain weak while manufacturing and services PMIs remained in the contractionary zone. In China, recent activity indicators point to signs of recovery with pickup seen in retail sales, PMIs, merchandise exports, credit growth, manufacturing investments, industrial profits, etc. However, real estate investments continue to remain under pressure.
Inflation, especially Core CPI, continues to trend lower at a gradual pace but remains above the Central Banks' targets in the AEs including the US, EU and Japan. However, a tight labour market along with revision in US Fed's SEP suggest US Fed could keep the rates elevated for an extended period. Similarly, there is a growing consensus on ECB to maintain its rate over the next one year.
Current account deficit narrows YoY, likely to remain comfortable for FY24: Current account deficit narrowed to 1.1% of GDP in Q1FY24 (Q1FY23: 2.1%) driven by lower oil prices along with deceleration in NONG imports. Invisibles growth also remained muted as uncertainty about the global growth slowdown weighed on the services exports, especially IT. Remittances, however, continue to remain steady. Capital flows, on the other hand, showed significant improvement led by a sharp increase in FPI flows. However, the FDI flows and interest rate sensitive flows like ECB and trade credit remained benign driven by elevated interest rates and ongoing quantitative tightening.
| USD bn | Q1FY23 | Q2FY23 | Q3FY23 | Q4FY23 | Q1FY24 |
|---|---|---|---|---|---|
| Trade (Deficit) / Surplus | -63.1 | -78.3 | -71.3 | -52.6 | -56.6 |
| Net Oil Imports | -26.3 | -29.5 | -29.3 | -27.0 | -24.3 |
| Net Gold Imports* | -9.9 | -10.5 | -7.6 | -5.0 | -8.6 |
| Trade deficit ex oil & gold | -26.9 | -38.3 | -34.5 | -20.6 | -23.8 |
| Net Invisibles exports Surplus / (Deficit) | 45.1 | 47.4 | 54.5 | 51.3 | 47.4 |
| Current account Surplus / (deficit) | -17.9 | -30.9 | -16.8 | -1.3 | -9.2 |
| % of GDP | -2.1% | -3.8% | -2.0% | -0.2% | -1.1% |
| Capital Account Surplus / (Deficit) | 22.5 | 0.5 | 27.9 | 6.9 | 33.6 |
| FDI | 13.4 | 6.2 | 2.0 | 6.4 | 5.1 |
| FII | -14.6 | 6.5 | 4.6 | -1.7 | 15.7 |
| ECBs, Assistance, etc. | -0.7 | 2.8 | 1.7 | 6.9 | 9.4 |
| Trade credits | 5.1 | 0.3 | 1.5 | -0.3 | -5.0 |
| Banking capital | 19.2 | -10.9 | 12.0 | -7.7 | 10.6 |
| Others | 0.2 | -4.4 | 6.1 | 3.3 | -2.2 |
| Balance of Payments | 4.6 | -30.4 | 11.1 | 5.6 | 24.4 |
* Source- CMIE; *Net gold imports refers to import of gold, silver and precious stones less exports of gems & jewelry
Sharp rise in oil from here on poses key risk to India's external accounts as India imports ~85% of its oil demand. Further, given the strong domestic demand, the NONG net imports are likely to remain strong too. However, we expect current account to remain within reasonable range as India's invisibles exports are likely to provide a cushion. The increase in invisible exports is driven by an improvement in IT services and other business services exports along with steady net remittances.
Indian economic activity remains steady: High frequency indicators show that growth continues to remain steady. Commencement of the festive season led to a rebound in demand for discretionary products such as PV and 2-wheelers. Unemployment rate fell while GST collections and power demand grew at a healthy pace. Business activities too remained steady reflected in strong PMIs and power demand, although E-way bills generation growth moderated.
| Indicators | Units | Mar-23 | Apr-23 | May-23 | Jun-23 | Jul-23 | Aug-23 | Sep-23 |
|---|---|---|---|---|---|---|---|---|
| Retail registration - Auto@ | ||||||||
| 2W | YoY, % | 12.8 | -7.1 | 9.6 | 6.9 | 8.2 | 6.3 | 21.6 |
| PV | 9.7 | -4.8 | 1.1 | 0.7 | -21.3 | -9.4 | 6.5 | |
| MHCV | 19.9 | 8.8 | 10.2 | 1.0 | 8.0 | 12.0 | 12.8 | |
| LCV | -0.8 | -5.3 | 2.4 | -3.5 | -3.1 | 1.8 | 1.0 | |
| Tractors | 7.2 | 2.0 | 10.2 | 42.7 | 25.2 | 17.0 | -6.6 | |
| Gross GST Collection | 12.7 | 11.6 | 11.5 | 11.7 | 10.8 | 10.8 | 10.2 | |
| Average E-Way bill generated | 16.3 | 12.2 | 19.7 | 15.5 | 16.4 | 19.5 | 9.5 | |
| Power demand | -2.1 | -1.8 | -0.4 | 4.3 | 8.0 | 16.3 | 10.3 | |
| Digital Spending& | 37.5 | 35.6 | 35.0 | 35.5 | 35.7 | 37.7 | 32.8 | |
| Railway Freight Tonnage | 3.8 | 3.5 | 1.9 | -1.9 | 1.5 | 6.4 | 6.8 | |
| Railway Freight Earnings | 10.5 | 6.8 | 4.0 | -1.0 | 3.2 | 2.7 | 5.1 | |
| Manufacturing PMI^ | Index | 56.4 | 57.2 | 58.7 | 57.8 | 57.7 | 58.6 | 57.5 |
| Services PMI^ | Index | 57.8 | 62.0 | 61.2 | 58.5 | 62.3 | 60.1 | 61.0 |
| Unemployment | % | 8.1 | 8.5 | 7.6 | 8.5 | 7.9 | 8.1 | 7.1 |
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 indicators continue to show resilience despite rising global headwinds. We expect the growth momentum to remain steady in the coming quarter driven by improvement in consumption during the upcoming festive season. However, spatial and temporal distribution of monsoon and its impact on crop yield may weigh on rural sector.
Rebound in direct tax collections keeps fiscal deficit on track to achieve BE target: Fiscal deficit as % of GDP rose marginally to 2.3% by the end of August 2023 (PY: 2.2%) as direct tax collections saw a remarkable improvement in August 2023 a er slow growth in the first four months of the fiscal year. While GST collection growth remained steady, growth in customs duties was better than expected. On the other hand, robust spending in both revex and capex continued. Government continues to front-load capex driven by rail and roadways spending. Revenue spending also grew at a healthy pace driven by disbursement of fertiliser subsidy, MNREGA spending and transfers for PM-KISAN.
| FYTD ending | Aug-22 | Aug-23 | Change (YoY) |
|---|---|---|---|
| Gross tax revenue | 10,206 | 11,892 | 16.5% |
| Total Direct Tax | 4,732 | 5,993 | 26.6% |
| Total Indirect Tax | 5,474 | 5,899 | 7.8% |
| Less: Share of States & others | 3,205 | 3,852 | 20.2% |
| Net Tax collection | 7,001 | 8,039 | 14.8% |
| Non-Tax Revenue | 1,168 | 2,096 | 79.4% |
| Total Revenue Receipts | 8,169 | 10,135 | 24.1% |
| Total Capital Receipts | 315 | 154 | -51.1% |
| Total Receipts | 8,484 | 10,289 | 21.3% |
| Total Revenue Expenditures | 11,377 | 12,980 | 14.1% |
| Total Capital Expenditures | 2,523 | 3,738 | 48.1% |
| Total Expenditures | 13,900 | 16,718 | 20.3% |
| Gross Fiscal Deficit | -5,416 | -6,428 | 18.7% |
| Fiscal Deficit as % of GDP | -2.2% | -2.3% |
Source: CMIE
Sharp rebound in direct tax collections have rested the concerns on fiscal slippage. Further, higher outlay on fertiliser subsidy and shortfall in divestment receipts is likely to be offset by a higher-than-expected dividend from RBI and PSUs. Going forward, we expect fiscal deficit to remain close to target.
Retail inflation moderates, likely to remain elevated in the near term: CPI inflation in Aug'23 eased to 6.8% (July-23: 7.4%) led by vegetable prices as tomato prices cooled significantly. However, prices of cereals and pulses remain elevated along with spices. Excluding food, the CPI continues to trend lower at a gradual pace. Core inflation remains largely unchanged with health, education and personal effect inflation continuing at elevated levels.
| YoY, % | Jul-23 | Aug-23 | Change in % |
|---|---|---|---|
| CPI | 7.4 | 6.8 | -0.6 |
| Food & Beverages | 10.6 | 9.2 | -1.4 |
| Fuel and Light | 3.7 | 4.3 | 0.6 |
| Housing | 4.5 | 4.4 | -0.1 |
| Transportation & communication | 2.5 | 2.5 | -0.0 |
| Core CPI@ | 5.7 | 5.7 | -0.0 |
Source: Bloomberg; *Market prices as on September 30, 2023. ^M-o-M change.
& - change during
FY24 Summary and Conclusion:
| Amount in USD billion | Jul-23 | Aug-23 | Change |
|---|---|---|---|
| Trade Deficit / (Surplus) | 18.5 | 24.2 | 30.7% |
| Net Oil Imports | 5.1 | 7.3 | 44.6% |
| Net Gold Imports | 3.2 | 4.5 | 40.9% |
| NONG net imports | 10.2 | 12.3 | 20.6% |
Source: CMIE, Ministry of Commerce; *NONG includes net imports of gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery.
The recent price trend suggests that tomato prices have plunged from their peak and its full impact should be visible in September 2023 CPI print. Over the next couple of quarters, CPI is expected to moderate and is expected to remain within the range of 4%-6% driven by a lagged impact of tighter monetary policy and lower input price pressures. However, spatial distribution of monsoon remains a concern and could adversely affect kharif yields and thus, poses an upside risk to food inflation. Further, rise in oil prices along with resilient domestic demand could keep upward pressure on CPI.
Trade Deficit widens, likely to remain elevated in the near term: Trade deficit widened significantly in Aug'23 on account of broad-based increase – oil, gold and NONG* imports. The rise in oil prices led to an increase in net oil imports while higher gold volumes led to increase in net gold imports. The resilient domestic demand kept the NONG imports high. The key items which saw an increase are chemicals, metals, machinery and transport equipment. NONG exports remained muted too.
Domestic demand is likely to remain upbeat as India enters the festive season. Further, oil prices have jumped from the lows and if sustained, can keep oil imports high. Hence, trade deficit can remain elevated in the coming months.
Commodity prices: Saudi Arabia and Russia's decision to extend their cut of crude oil by a combined 1.3 mn barrels till the end of 2023 led to a sharp rise in the price of crude oil, which averaged USD 90 per barrel (for the month), a first since November 2022. Metal prices showed a mixed picture with zinc and aluminium prices rising, while that of steel, copper and lead fell modestly. Gold prices fell as US treasury yields rose sharply during the month.
| Market price (USD)* | Sep-23^ (%) | FYTD24& (%) | |
|---|---|---|---|
| Brent Crude (per barrel) | 95.3 | 9.7 | 19.5 |
| Gold (per ounce) | 1,849 | (4.7) | (6.1) |
| Steel (per tonne) | 540 | (2.7) | (17.6) |
| Zinc (per tonne) | 2,641 | 9.5 | (9.2) |
| Copper (per tonne) | 8,231 | (1.5) | (7.9) |
| Aluminium (per tonne) | 2,331 | 7.6 | (1.9) |
| Lead (per tonne) | 2,209 | (0.2) | 3.0 |
Source: CMIE, Ministry of Commerce; *NONG includes net imports of gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery.
Global growth continues to remain better than anticipated, although there are pockets of weakness. As US economic activity remains better than expected and the possibility of a so landing has increased, Eurozone growth remains tepid. China's economic activity seems to have bottomed out and reforms and growth supportive measures can push the growth momentum higher. Elevated interest rates and modest demand outlook are likely to keep housing and manufacturing activity benign. Overall, global growth is expected to slow down driven by tighter financial conditions and losing consumption momentum. While inflation has been much lower than the levels seen in 2022, surge in crude oil prices could prove to be a major upside risk to the inflation outlook.
Indian economic activity continues to show healthy growth momentum and is still better than most other economies. Onset of festive season and lower unemployment rate might support consumption. With heavy rainfall in September, India managed to dodge a drought a er one of the driest Augusts in a century. However, uneven monsoon and its impact to crop yields remains a key variable for rural consumption recovery. While trade deficit widened month-on-month, resilient services exports are likely to cushion the impact. We remain optimistic on India's growth prospects on the back of resilient investment activities, benign commodity prices and supportive fiscal policies along with optimistic outlook on consumption. Current account is expected to improve too in FY24 but rising oil prices and moderating global demand for services are key risks. 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, conditions for pickup in private corporate capex remains conducive given the low leverage, rising capacity utilization, steady corporate profitability and robust balance sheet of the banking sector.
