Reinforcing the Indian growth story on a day that saw a JP Morgan move to include India in emerging market index unleashing the potential of massive capital flows, the Economic Report of the Finance Ministry for the month of August 2023, shows strong domestic demand for consumption and investment as the driver of a GDP growth of 7.8 per cent in Q1 of FY24, also tangible in the performance of high-frequency indicators (HFIs), even as it flags risks of steadily climbing crude oil prices. With all factored in, the report suggests continuing comfort with the Finance Ministry’s 6.5 per cent real GDP growth estimate for FY24 with symmetric risks.
The healthy performance of the corporate sector has vindicated and strengthened investors’ confidence in the Indian growth story, as highlighted by the report. This confidence is reflected in the impressive performance of the Indian capital markets which outperformed some of the emerging market and advanced economies. Foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) supported the buoyancy in the markets. In the bonds segment, while there was a marginal uptick in G-sec yields, these are expected to fall as inflationary pressures abate. Government commitment to fiscal prudence will also aid in keeping G-sec yields in check.
The August report dwells at length on the banking sector of the economy which shows increasing resilience through declining non-performing assets, improving capital to risk-weighted asset ratio, rising return on assets and return on equity as of March 2023. Similarly, non-banking finance companies (NBFCs) indicated improvements in their profitability and risk-taking behaviour. Further, as per the July 2023 estimates by the RBI, there has been consistent and broad-based growth in the non-food bank credit of Scheduled Commercial Banks (SCBs) since April 2022. The robust health of the banking system can be attributed to the deleveraging process undertaken by the corporate sector over the previous decade. During the pandemic years, the fall in sectors’ earnings resulted in debt levels rising again. With easing restrictions, steady economic recovery led to gradual improvement and strengthening of the balance sheets of corporates, as evident in the decline in core debt of the private non-financial sector and an improvement in various leverage ratios. The Finance Ministry lauds the restructuring of the balance sheet which has placed the companies in a sound position to expand their investment and become more resilient to economic shocks. Growth momentum for the private non-financial companies continued from the last quarter of FY23 into the first quarter of FY24 and business sentiments remain upbeat, as per RBI’s Quarterly Enterprise Surveys.
Urban demand conditions remained resilient in Q1 of FY24, as reflected in the performance of various HFIs. With the steady decline in the urban unemployment rate contributing to keeping private consumption strong in the economy, the strengthening consumption led to a rise in demand for goods and services and both the manufacturing and the services sectors saw their output and value-added grow robustly in Q1 of FY24, the Finance Ministry reports in the August 2023 commentary.
Retail inflation decreased in August, with both core inflation and food inflation easing from the July figure, driven by the calibrated measures taken by the Government, including adjustments in the duties of many critical inputs and monetary policy tightening which helped to reduce core inflation to a 40-month low level. At a time when globally, food inflation remains high in many major economies, in India, consumer food price inflation eased to 9.9 per cent in August due to the Government intervention with targeted measures for specific crops, including build-up of buffers, procurement from producing centres and subsidised distribution. Complementing the robust economic growth in the first quarter of FY24, the organised sector employment also indicated healthy growth, including a rise in new members joining Employee Provident Fund Organization (EPFO) and more members rejoining than exiting the social security net.
Besides facilitating the formalisation of labour, the Government has also taken major steps to secure the future of unorganised workers through minimum guaranteed pension under Atal Pension Yojana, PM-SYM etc., forming an expansive social security net woven in recent years. The two-pronged approach of formalisation and social security for informal workers exemplifies a sustainable approach to long-term inclusive growth.
Underlining the lurking challenge of rising crude oil prices, the report also warns that the monsoon deficit in August could impact both Kharif and Rabi crops. That needs to be assessed.
However, it is heartening that rains in September have erased a portion of the rainfall deficit at the end of August. A stock market correction, in the wake of an overdue global stock market correction, is an ever-present risk. Offsetting these risks are the bright spots of corporate profitability, private sector capital formation, bank credit growth and activity in the construction sector.