Is the growth forecast for India on the upswing?
The first half of 2024 may see a lull of sorts, as the government gears up for the Lok Sabha elections.
Finance Minister Nirmala Sitharaman, who will present an interim Budget on February 1, has indicated that there will be no spectacular announcements, just a vote-on-account to meet public spending needs till a new government is sworn in.
But the last such exercise, before the 2019 polls, had included a rejig of income tax slabs and the unveiling of the PM-Kisan scheme that put cash in the hands of farmers.
The full Budget for the year, likely in July, will see a larger armoury of policy tweaks at play.
Most investors looking for governance and reform signals will have to wait till then, Ms. Sitharaman has said.
Policymakers will keep a keen eye on whether a private investment, which is beginning to rebound in sectors like steel, cement and auto, will become more broad based and allow the government to step off the public capex pedal and focus on fiscal consolidation.
“Politics may also create turbulence and uncertainty, as there are 40 upcoming national elections representing 41% of the global population in 2024 alone.
Russia, India, the European Union and the U.S., will hold elections that will likely re-shape the path of global affairs in the second half of the decade,” noted Avinash Satwalekar, president of Franklin Templeton Asset Management India.
Global voters’ mood amid an increasing shift to inward-looking, protectionist polity in many countries, could thus, impact trade deals and the broader direction of global economic engagement.
What are the positive surprises?
While most expect the RBI to start interest rate cuts in the second half of the year.
The U.S. Federal Reserve’s indication of a pivot from its rate hike cycle has prompted hopes of many other central banks following its cue.
A Bank of America report earlier this month said there will be 152 rate cuts next year from central banks around the world.
If they materialise, demand for Indian goods and services may yet get a bump-up in 2024.
In the Indian context, industry and consumers also eagerly await changes on two more rates - prices of petrol and diesel that have been frozen since mid-2022 and the unwieldy multiple GST rates’ framework.
Prime Minister Narendra Modi, during the recent Assembly polls’ campaign, hinted at a review of petroleum products’ retail prices.
Perhaps, some relief may be rung in before the Lok Sabha battle.
The GST rate rationalisation exercise may only gather steam after the elections but could figure as a poll promise.
Which are the sectors that have performed well?
The RBI, which had earlier projected India’s real GDP to grow 6.5% in 2023-24, has recently raised its forecast to 7%.
The Finance Ministry is more sanguine, indicating an uptick of over 6.5% for the year ending March 31, 2024, in its review of the economy published on December 29.
Global agencies have also rebooted their growth math for India. “Some of the key sectors of the economy — construction, manufacturing, financial and real estate services — are showing a robust growth and even the trade, hotels, transport sector which had remained below its pre-COVID level of 2019-20.
Slack global demand has been hurting goods exports through 2023, and IT-led services exports may feel greater heat in the coming year as developed economies continue to face challenges.
The fresh disruptions like the attacks on shipping lines in the Red Sea corridors could pose challenges.
Why are exports still sluggish?
Slowdown in Global Trade: The ongoing global economic slowdown, rising inflation, and geopolitical tensions like the Ukraine war dampen global demand for Indian goods.
Supply Chain Disruptions: Persistent global supply chain disruptions, rising shipping costs, and container shortages further impede the smooth flow of Indian exports.
Domestic Challenges:
Concentration in Low-Value Goods: A significant portion of Indian exports comprise commodities and low-value manufactured goods like textiles and apparel.
These sectors face intense competition from countries like Bangladesh and Vietnam with lower production costs, leading to thin margins and vulnerability to price fluctuations.
Limited Diversification: The Indian export basket lacks sufficient diversification. Reliance on a few sectors makes it susceptible to external shocks and hinders overall growth.
High Logistics Costs: Inefficient infrastructure, complex domestic regulations, and limited port capacity contribute to high logistical costs, making Indian exports less competitive internationally.
Skill Gaps and Labor Issues: Skill shortages in specific sectors, inadequate training programs, and labor market rigidities restrict the supply of skilled workforce needed for high-value exports.
Is inflation under control?
Headline inflation: According to the Consumer Price Index, India's headline inflation rate, based on retail prices, has been on a downward trend since peaking at 7.79% in April 2023.
In October 2023, it stood at 6.73% and projected to fall further by March 2024.
This is closer to the targeted range of 4% +/- 2% set by the RBI.
Core inflation: Excluding volatile food and fuel prices, India's core inflation rate has also shown a moderating trend, falling from 6.1% in January 2023 to 5.5% in October 2023.
RBI actions: The RBI has been proactive in raising interest rates and implementing tight monetary policy to curb inflation.
Government efforts: The Indian government has taken steps to address supply-side issues like food prices through public distribution systems and import measures.
Global commodity price fall: International prices of key commodities like crude oil and metals have seen some decline, potentially easing downward pressure on domestic inflation.
What is expected in terms of policy-making in an election year?
Election years in India typically bring about a shift in policy-making dynamics,.
Characterized by a blend of populism, strategic positioning, and considerations for long-term economic and social goals.
Short-term benefits and subsidies: Political parties often prioritize policies that offer immediate benefits to voters, such as cash transfers, loan waivers, or subsidized food prices. This can inflate government expenditure and strain fiscal resources.
Focus on core demographics: Parties vying for power may concentrate on the concerns of their core voter base, potentially neglecting the needs of other segments of the population.
Symbolic gestures and welfare schemes: Announcements of ambitious but often poorly planned welfare schemes might be made, aimed at generating positive publicity and electoral gains.
Emphasis on flagship programs: Incumbent governments highlight their past achievements and promise further expansion of successful initiatives.
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