India's economic growth is set to slow this fiscal year as the post-pandemic rebound fades and consumer demand moderates amid high inflation and an uncertain outlook, the research wing of HDFC Bank, the country's biggest private sector bank, said in a report. Gross domestic product growth is expected to moderate to 5.8-6.0 percent in the fiscal year 2024 from 6.8 percent in the previous year.
HDFC Bank economists expect the contribution of private consumption to overall growth to moderate this year and the divide between rural and urban demand to reduce.
Urban consumer demand is expected to moderate mainly due to the high cost for services, which forms a major portion of the urban consumer basket.
Further, tighter monetary conditions, a greater pass through of interest rate hikes and the adverse impact of a slowdown in hiring, especially in the global tech sector, could also damp discretionary spending. Rural demand is expected to recover steadily, rather than register a surge, amid mixed signals from various economic indicators such as inflation, wages and rising demand for jobs. The possibility of uneven monsoon on account of the El Nino, and the impact of heat waves are key risks for agriculture production and this could weigh on recovery in rural consumption, the report said. Net exports is expected to contribute negatively to GDP growth, although the drag could be slightly lower than last year.
Majority of the expected export slowdown this year is likely to emerge from merchandise exports that are forecast to shrink 6.5 percent. Among the reasons for the slump is the excessive reliance on developed markets of Indian exports that expose them to the slowdown in countries like the US and those in the EU, HDFC Bank economists said.
Service exports are expected to perform relatively better, led by consulting, research & development and tourism. However, a simultaneous fall in imports is likely to cushion the impact of a decline in exports on growth. Growth in imports is expected to moderate on the back of lower commodity prices as well as weaker domestic demand. Investments are expected to be the largest contributor to growth, led by government capital expenditure. The pick up in households' investments in residential dwellings is also expected to continue. That said, a stronger turnaround in private capital expenditure is unlikely this fiscal due to the rising uncertainty around growth and the global financial stability concerns. The Indian economy may be near its potential level that itself is likely to have come down due to the disruptions caused by the Covid-19 pandemic. The IMF estimates suggest that India's potential growth shrunk by 0.5 percentage points due to the pandemic and the lender estimates 6 percent potential growth till 2027. Meanwhile, the World Bank reckons the potential growth in India is close to 7.3 percent on average over the last decade and around 6.1 percent as of 2022. "Without policy interventions, India could continue to grow along this lower potential trend path over the medium term," HDFC Bank economists said. "India's medium-term growth strategy needs to be steered towards improving labor productivity, besides a focus on capex, to shift to a higher potential output path," they added.
Consumer price inflation is projected to slow to 5.3 percent in the financial year 2024 from an estimated 6.7 percent in the previous year. HDFC Bank economists projected no change in the Reserve Bank of India's benchmark interest rate, the repo, which is at 6.5 percent now.
