Positive surprises will continue, compelling an upward reset in trend-growth assumptions and triggering upgrades to India’s GDP forecasts. However, intensifying global headwinds still pose a challenge and can result in deceleration of growth in FY25.
Axis Bank’s Chief Economist Neelkanth Mishra in the Bank’s India Economic and Market Outlook 2024 report on Monday said that domestic resilience is likely to continue offsetting global headwinds.
After the sharp post-Covid rebound, global growth has weakened as monetary conditions have tightened globally and some major economies have slowed their fiscal stimulus.
India’s GDP growth is surprisingly positive despite several headwinds like fiscal consolidation, higher domestic interest rates, tightening liquidity conditions, and slowing exports of goods and services.
A further 70/20 basis point (bps) upgrade to FY24/25 forecasts is expected as per the consensus, making India’s growth revisions second only to the United States (US).
The report highlights that the US’ growth is supported by unsustainable fiscal support and is likely to disappoint with intensifying global headwinds, keeping the outlook conservative on India’s FY25 growth at 6.5%.
India’s GDP growth touched 7.6% during the September quarter after logging a 7.8% growth rate during the previous quarter. The RBI had earlier projected India’s growth forecast at 6.5% before revising it to 7% Friday.
The Union government’s growth estimate for FY24 is in line with the RBI’s (RBI) revised growth assessment of 7%, Economic Affairs Secretary Ajay Seth also said on Friday.
Also Read: RBI raises FY24 GDP growth to 7% after surprise upside in Q2
Boosted by cyclical recovery in capital formation (real-estate and corporate capex) and structural drivers (better infrastructure, formalization), Axis Bank too expects trend-growth estimates for India to get revised to 7%+.
Inflation to gradually return to target
Slow moderation is expected to persist in core inflation, as the GDP gap vs the pre-pandemic path is narrowing but is still at 1.3 years of growth.
The moderation in services inflation, reflecting slack in the labor force, is evidence of this trend. Fiscal discipline, building infrastructure, and a pick-up in capex will also contribute over time, the economist said.
“Core is currently annualizing well below the 4% target, though global factors (like gold) and strength in housing rents can push it up. The policy challenge though would come from volatility in food inflation, keeping inflation above the mid-point of the target for most of next year,” he added.
The report further highlights that tight liquidity conditions, equivalent to a 25-30 bps rate hike, can ease once global risks fade. If the government sticks to a 4.5% fiscal deficit in FY26, bond yields could ease too.
