Domestic Demand Drivers Intact, Slowdown Fears Unfounded: Analysts

A Wall Street brokerage has downplayed the slowdown fears arising after the poor December quarter data prints, saying the moderate numbers are due to the base effect and that the January data clearly show that domestic demand drivers are intact. According to Morgan Stanley India chief economist Upasana Chachra and her deputy Bani Gambhir, the apparent deceleration in the December quarter number come from the mixed trends in high-frequency domestic demand indicators coupled with a slowdown in external demand as visible from shrinking exports, creating fears of an impending growth slowdown.

Accordingly, they choose to stand out, expecting a 6.2 per cent GDP growth in FY24 as against the 6 per cent consensus forecasts, reiterating their view that domestic demand is likely to sustain the growth momentum. While the budget has not offered a clear GDP growth number for next fiscal, saying it is likely to grow in 6.0 to 6.5 per cent range, the Reserve Bank in its latest assessment has pencilled in a 6.4 per cent growth next fiscal.

Admitting that the high-frequency growth data have been mixed in the last quarter, showing some signs of slowdown, the economists blamed the same on a combination of base effect and distortions from festivals which led to a bunching up of demand and loss of production days to holidays. But the January data show an improvement both annualised and sequentially, they argued. "In this context, we believe that the trends in incoming data are consistent with our view of GDP growth at 6.2 per cent in FY24. The factors which will lead to a healthy growth trend this year are: full economic reopening in 2022, which is leading to a cyclical recovery in consumption; pickup in private capex with healthy balance sheets of corporates and financial sector players; and acceleration in government capex.

"We believe the key for sustained domestic demand is a pickup in capex, which will help create more jobs, and which in turn will lead to a virtuous cycle of more jobs, higher income, higher saving and higher investment," they said. Risks stem from external factors such as depth and duration of global growth slowdown and implications for capex recovery, along with changes in commodity prices and capital flows with implications for macro stability and domestic policy, they warned.

While aggregate domestic activity accelerated to 8.1 per cent in January from 4.8 per cent in December on-year, it improved to a 10-month high of 4.6 per cent sequentially. However, they expect GDP to moderate in the second half of F23 from first half, due to base effect and as sequential momentum in activity get more normalised.

On the sustaining private consumption, which constitutes 59.3 per cent of GDP, making it the largest source of domestic demand and key driver of growth, the analysts said with the economy having fully reopened, a cyclical recovery is underway in consumption, with both goods and services gaining pace, this is only going to get better. In fact, private consumption rose 9.7 per cent on-year in September 2022 from 1.8 per cent in March 2022. On a three-year CAGR basis, it rose to 3.6 per cent from 3.3 per cent, respectively.

They expect the healthy household balance sheet with low level of debt and increase in savings over the pre-pandemic levels to primarily support consumption demand. At 18.4 per cent in FY22, the country's household debt remains low relative to its per capita income, especially in comparison to other emerging markets such as China, Thailand and Malaysia.

In addition, the improving trend in household financial savings, which are tracking at 8.3 per cent of GDP in FY22 as against 7.9 per cent of GDP in FY19, is likely to be sustained, given the improvement in household balance sheets. Another driver is the resilient jobs market, especially in non-IT sectors, which is offsetting the slowdown in IT hiring. On-ground data reflect that labour market conditions have normalised substantially.

A 33.5 per cent growth in non-IT sector hiring in the three months ending January has offset the slack in the IT hiring. Hiring in non-IT sectors is being led by insurance, oil & gas, and contact-intensive sectors such as hotels, restaurants, and airlines sectors. The economists also point towards the improvement in households' purchasing power with moderating inflation and inflation expectations remaining fairly steady.

Expecting inflation outlook to be benign going forward, they see inflation decelerating to 5.4 per cent in FY24, further down to 4.8 per cent in FY25, from 6.6 per cent in FY23, driven by sequential easing in commodity prices. They pencilled in a long pause by the Reserve Bank on the policy rate, saying "we are at the end of the monetary policy normalisation because financial conditions are likely to remain steady from here on."