Consumption demand, which remained muted in the second half of FY23, could now get a leg up, thanks to lower inflation, bridging the gap with the strong outputs of key services industries, economists said. They also saw the possibility of an upward revision of the private final consumption expenditure (PFCE) in the last fiscal.
While robust services exports have pushed growth in the last two quarters, some concerns have been raised over whether this would continue through the current fiscal, given the exchange rate volatility, banking-sector concerns in the US and the imminent slowdown in the west.
Gross fixed capital formation, which grew 8.9% on year in Q4FY23, could be dampened in the short-term, as merchandise exports are facing global headwinds. Front-loading of government capex and publicly funded infrastructure projects are key to sustaining the pace of capital formation in the the current quarter and the next.
Medium-term prospects of investment demand, however, look good, with the need for capacity expansion being felt across a number of sectors, apart from basic metals, steel, cement and commercial real estate, which have already started investing.
PFCE grew at disappointing rates of 2.2% and 2.8%, respectively, in the third and fourth quarters of last fiscal, at odds with the rather broad-based pick-up on the output side. Government consumption was the only other demand component, which stayed in torpor in recent-past quarters.
“The muted growth in PFCE belies the sustained improvement in consumer sentiments as well as the recovery in high frequency indicators related to services sector, such as domestic airline traffic and hotel occupancy levels,” Aditi Nayar, chief economist and head research and outreach at Icra said.
“Consumption is showing a K-shaped recovery (when parts of the economy show a high growth while others decline)… The current consumption demand is highly skewed in favour of goods, and services are largely consumed by the households in the upper-income brackets,” principal economist, India Ratings and Research, Sunil Sinha said.
Nayar, however, is of the view that expenditure-side GDP numbers are prone to revision and PFCE could be revised upwards.
According to Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, with high inflation and interest rates some moderation in consumption demand was to be expected. “However, we believe that with the Reserve Bank of India’s rate hike coming to an end and lower inflation ahead, consumption demand will pick up,” he iterated.
High capacity utilisation, announcements of new investments by Corporate India, improving balance sheets of companies and banks, declining inflation and expectations of lower interest rates going ahead, point to the long-awaited revival of private investment, most analysts feel.
“The decline in merchandise exports amid global headwinds is expected to dampen the volume growth in manufacturing output and impart cautiousness in terms of fresh capex in the near term,” Nayar said. According to her, sustenance of domestic demand will still drive capacity utilisation in the first half of the current fiscal and the pace of incremental capacity addition through the year.
Ghosh, however, opined that realignment of global supply chains, transition to green energy and ongoing technological advancements provide a congenial environment for pick-up in investment activity and raising productivity. “Private investment growth is also expected to strengthen with the production-linked incentive scheme providing additional fillip,” he said.
For now overall exports continue to do well. The growth in exports in FY 23 was 13.6% on year with a big role played by services like IT and IT enabled Services. “Headwinds stemming from potential slowdown in advanced economies can temper that growth,” according to Nayar. Germany, the biggest economy in Europe, has officially entered recession and analysts are predicting something similar for the US and UK.
Ghosh believes that the current trend of strong growth in services exports is sustainable. “The rapid evolution of global capability centres in India, which are the business units set up by global conglomerates to outsource work of execution could be one of the reasons for buoyant services exports. … The segment will continue to grow in leaps and bounds and because of the trickle-down effect, there should be more jobs in India,” he said.
Another upside to the economy is expected from government capital expenditure and agriculture.
“A good rabi crop and the expectation of normal monsoon indicate that the outlook for FY24 will be as good as FY23,” Ghosh said.
With the inflation coming down and with it the nominal GDP growth, it raises doubts about the government meeting its tax collection target and its ability to meet capital expenditure commitments and fiscal deficit targets.
SBI’s chief economist, however, said the government expenditure would continue to rise as taxes continue to grow well in real terms because of better compliance.
Goods & services tax collection grew 12% on year in May to Rs 1.57 trillion. This followed a collection of Rs 1.87 trillion in April. “The monthly average GST collection increased to Rs 1.5 trillion in FY 23. If we assume it goes up to Rs 1.75 trillion this year then the government’s GST revenues would be higher than their budget estimates by Rs 80,000 crore,” he said.
“RBI’s recent surplus transfer is positive for this year’s fiscal maths, but there are other pressures in the pipeline by the way of higher fertiliser subsidy outlay and softer nominal GDP growth,” executive director and senior economist, DBS Bank, Radhika Rao, said.