Will Indian Economy Continue Growth Momentum in FY25?

Kotak Insights | Date 28/03/2024

The Indian economy has captured global attention for its resilience and growth potential.

As we step into the fiscal year 2025 (FY25), the question on everyone's mind is whether India will sustain its growth momentum?

Let's explore this query through insights from the recently published Monthly Economic Review Report by the Department of Economic Affairs.

From key indicators, global investor sentiment to trade dynamics – here’s how some key factors have shaped the Indian economy in FY24 and how are they expected to move in FY25.

The Monthly Economic Review Report

Looking at the review from the last month, India's economic performance in February 2024 remained robust, bolstered by sustained growth momentum and stable macroeconomic fundamentals.

The key highlights include:

• Growth Trajectory: India surpassed expectations with a six-quarter high growth rate in Q3FY24, continuing its upward trajectory.

• Capital Market: Despite geopolitical challenges, India's capital markets remained resilient.

• Inflation Management: Retail inflation remained stable within the target range for six consecutive months, supported by strong domestic growth and favorable commodity prices.

• Employment Trends: Positive trends emerged in employment, with a decline in the unemployment rate and increased labor force participation in 2023.

Let us have a closer look at some of these…

India’s Growth Trajectory

India's gross domestic product (GDP) growth estimate for FY24 has been revised upwards to 7.6%, showcasing the enduring strength of the economy.

This growth trend, above 8% for three consecutive quarters, positions India as a standout performer globally.

And it’s not just the data, but various agencies who also echo a similar sentiment.

In line with the official statistics and the upward revision of various growth estimates, SBI Research and Moody’s expect India’s GDP growth for FY24 to be 8%. Fitch and Barclays raised their growth forecast for FY24 to 7.8%.

Which factors drove this growth?

• Effective Capex: The government’s focus on capital expenditure (capex) has spurred private investments, with effective capex expected to reach 4.6% of GDP in FY25, as per the Interim Budget. This is a substantial 200 basis point increase from 2.6% of GDP in FY20.

• Steady Private Consumption: There is a steady consumption demand which is backed by resilient urban demand and anticipated rural consumption growth due to a normal monsoon forecast in FY25.

• Strong Manufacturing Growth: Manufacturing sector saw double-digit growth in Q3 of FY24 driven by an investment surge, improved investor confidence, and strong domestic demand. The volume indicators like the Index of Industrial Production have also observed growth of 5.8% during Q3 of FY24.

• Rising Construction and Housing Growth: India is witnessing a robust increase in cement and steel production, which bodes well for a sustained rise in construction activity. Aided by government interventions and increased demand for residential properties in tier-2 and tier-3 cities, the construction sector is capturing new markets.

• Service Sector Growth: Continued expansion in non-contact-intensive service sectors also contributed to the overall economic growth momentum. The sector supported growth by registering a 7% YoY growth in Q3FY24. Let us now have a look how Indian capital markets fared in FY24.

Capital Markets Stand Out Tall

Despite geopolitical risks and volatile commodity prices, Indian capital markets remained one of the best performing among emerging markets in FY24.

In the first eleven months of FY24, capital worth Rs 98,112 crore (equity + debt) was raised by the corporates from the primary market through public and rights issuances.

During April 2023 to February 2024, 345 companies were listed on stock exchanges.

India’s equity market also witnessed a rise in the number of demat accounts. As per the NSDL and CDSL data, the number of demat accounts in India opened in February 2024 soared to over 43.5 lakh, 38.6% higher compared to the corresponding period last year. This reflects growing investor participation and confidence.

And according to a Bloomberg report, India became the fourth biggest equity market in January 2024, surpassing the stock market capitalisation of Hong Kong.

Global Trade Remains Subdued

There are hiccups on the global trade front for India.

This is because global trade growth is still subdued. As per the report, export orders are generally modest, particularly in manufacturing, and new supply disruptions are appearing.

Moreover, attacks on shipping in the Red Sea have also resulted in trade flows being re-routed so that the shipping costs have risen sharply, and delivery times have lengthened, especially for trade from Asia to Europe.

Nevertheless, there could be good news as the Organisation of Economic Cooperation and Development (OECD), in its February 2024 Interim Economic Outlook, forecasts an improvement in global trade in the near future. And Asia's reviving production of semiconductors and electronics, coupled with a rise in car sales, is providing a much-needed lift to its merchandise trade.

Inflation Under Control?

Retail inflation has remained within the Reserve Bank of India’s (RBI) tolerance range of 2% to 6% for six consecutive months, with headline inflation at 5.1% in February.

Core inflation has also moderated, reflecting stability in inflationary pressures.

Inflation in February moderated mildly in all groups in the core CPI basket – clothing, footwear, housing, household goods & services, health, transport and communication, recreation and amusement, education, personal care and effects.

Overall, inflation averaged 5.4% in FY24, lower than the 6.8% recorded in the corresponding period of FY23.

In Conclusion…

India's strong economic performance, as reflected in the recent data releases and announcements, stands out amidst the sluggish global growth.

While robust investment activity is underway, strengthening private consumption demand is evident from indicators like rising air passenger traffic and sale of passenger vehicles, digital payments, improved consumer confidence and expectations of a normal monsoon.

Additionally, the increased demand for residential properties in tier-2 and tier-3 cities augers well for furthering construction activity.

The announcement by Bloomberg that India would be included in its bond index from January 2025 should bolster further capital inflows.

In FY25, however, the current account deficit will bear watching.

So, on the whole, India looks positively towards the dawn of FY25, driven by resilient domestic demand, robust investment activity, and supportive government policies.

Nevertheless, we will have to wait and watch how FY25 pans out for the economy as well as the capital markets.

We will be back with another exciting story next week!

Until then…

Stay Tuned!

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Sources and References:

• Department of Economic Affairs
• Monthly Economy Review – February 2024

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