India’s financial progress slowed to six.5 per cent through the July-September quarter due to a fading low-base impact. For the complete yr, we now anticipate the economic system to develop at 7 per cent, with dangers tilted to the draw back. This suggests that the second half of the yr (October-March) will see progress decelerate to 4.6 per cent, once more largely as a result of base impact and slowing international progress.
This was the second consecutive quarter with no purposeful disruption of financial exercise by the Covid-19 pandemic. Since October, Google, too, has stopped reporting mobility indicators, which had turn out to be one of the tracked knowledge factors for analysts and policymakers because the pandemic struck. This implies that Covid-19 is unlikely to come back in the way in which of progress for many elements of the world, with China, which is following a zero-Covid coverage, being the important thing exception. That’s the excellent news.
The not-so-good information is that geopolitical tensions, excessive and broad-based inflation in lots of elements of the world and sharp will increase in coverage charges in developed nations amid a looming recession will proceed to confront the worldwide economic system. In an interconnected world, these results will spill over to India as nicely, regardless of its structural strengths.
Rising at 14.7 per cent, contact-intensive companies akin to commerce, inns and transport continued to be key drivers of the expansion momentum within the second quarter. This section had borne the brunt of the pandemic due to recurrent lockdowns, and is displaying a robust rebound due to pent-up demand — a pattern that’s prone to proceed this yr. Curiously, the sector is simply 2 per cent above the pre-pandemic degree and has been the slowest to catch up.
Non-public consumption was fairly sturdy within the second quarter, rising by 9.7 per cent, and now 11.2 per cent above the pre-pandemic degree. The resilience of home demand will form the contours of GDP progress in coming quarters as the worldwide progress momentum is anticipated to lose steam. Superior economies, whose progress is predicted to sluggish sharply subsequent yr, account for nearly 45 per cent of India’s merchandise exports.
Manufacturing GDP progress slowed slightly sharply as a result of base impact and margin strain on manufacturing firms. That is considerably contradictory to the comparatively sturdy alerts from the Buying Managers’ Index (PMI) which, at 55.9, was within the enlargement zone through the July-September quarter, whereas additionally being slower than the IIP progress of 1.4 per cent in the identical quarter.
At present, manufacturing is discovering some assist from authorities spending on infrastructure, notably in sectors akin to metal and cement. The festive season-related manufacturing and the continued sturdy demand within the car sector (particularly in high-value segments), was not sufficient to stop an general slide in manufacturing. Manufacturing is prone to face headwinds within the second half of this fiscal, because the gloomier international atmosphere has began hitting export progress. Merchandise exports shrank 16.7 per cent in October. However easing margin strain because of falling enter costs will present some cushion to manufacturing GDP within the second half of this fiscal.
Regardless of climate-related disturbances, agriculture surprisingly held its floor within the second quarter. Though rains have been 6 per cent above regular this yr, they have been fairly lopsided and led to a drop in rice acreage in among the rice-growing areas on account of rainfall deficiency and a few harm to crops from extra unseasonal rains in October. In actual fact, October rains have been 47 per cent above the long-period common. Rain shortfall in some areas, extra in others, and unseasonal extra rains level in the direction of some hit to kharif manufacturing.
That mentioned, the prospects for the winter crop (rabi crop), which is basically irrigated, look good owing to beneficial soil moisture situations and wholesome reservoir ranges. Whereas rabi sowing was initially delayed on account of unseasonal October rains, it’s now progressing nicely, with sown space till November 18 about 7 per cent larger than throughout the identical interval final yr. This pattern, if sustained, ought to offset the hit to kharif manufacturing to some extent. General, we anticipate agriculture to develop at 3 per cent this yr, decrease than the decadal common of three.8 per cent.
Irregular climate has additionally triggered meals inflation, notably in cereals, which is able to cool off solely when the prospects for rabi crop turn out to be clear. Whereas fall in inflation in October was largely because of a excessive base impact, core inflation continues to be sticky and meals inflation dangers persist. We foresee shopper inflation averaging 6.8 per cent this yr. The RBI is prone to hike charges by 25 foundation factors in its December coverage meet, after which we anticipate it to go for a wait-and-watch method to evaluate the influence of its earlier fee hikes in addition to the actions of different central banks such because the US Fed.
To this point, wholesome tax income collections have allowed the federal government to finance its bloated subsidy invoice and investments with out a lot strain on the fiscal deficit. Led by authorities capex, investments grew 10.4 per cent within the second quarter.
Alternatively, sturdy company steadiness sheets not solely cushion them in opposition to international headwinds but in addition present a chance to kick-start the funding cycle as soon as uncertainty subsides. On this milieu, the production-linked incentive scheme has incentivised personal funding and fast-forwarded manufacturing investments in electronics and prescribed drugs.
With the price range approaching, all eyes are actually on the outlook for the following yr. We now have lowered our progress expectations for 2023-24 to six per cent from 6.5 per cent for 2 causes.
One, India’s progress cycle has turn out to be well-synchronised with these of superior economies. So, a pointy slowdown in these nations will spill over to India. Two, the utmost influence of home rate of interest hikes on progress will play out subsequent fiscal on condition that financial coverage impacts progress with a lag.
The important thing coverage problem for India might be to handle a delicate touchdown amid the potential of a tough touchdown in superior nations.
The author is Chief Economist, CRISIL Ltd