December 11, 2023
Positive surprises will continue, compelling an upward reset in trend-growth assumptions and triggering upgrades to India’s GDP forecasts, maintains Axis Bank’s Chief Economist Neelkanth Mishra in the Bank’s India Economic and
Market Outlook 2024 report. Intensifying global headwinds can drive a growth deceleration in FY25. Mishra and co-authors Tanay Dalal and Prateek Ancha also caution that while core inflation moderates, volatile food inflation is likely to hold
headline inflation.
Report Highlights:
Domestic resilience likely to continue offsetting global headwinds.
- India’s GDP growth is surprisingly positive despite several headwinds: fiscal consolidation, higher domestic interest rates, tightening liquidity conditions, and slowing exports of goods and services.
- Expect a further 70/20bps upgrade to FY24/25 consensus forecasts, making India’s growth revisions second only to the United States (US).
- US’ growth is supported by unsustainable fiscal support and is likely to disappoint with intensifying global headwinds, keeping us conservative on India’s FY25 growth at 6.5%.
- Axis Bank expects trend-growth estimates for India to get revised to 7%+, boosted by cyclical recovery in capital formation (real-estate and corporate capex) and structural drivers (better infrastructure, formalization).
Inflation to return to target gradually, limiting easing options.
- Axis Bank expects the slow moderation in core inflation to persist, 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.
- 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.
- Tight liquidity conditions, equivalent to a 25-30 bps rate hike, can ease once global risks fade. If the government sticks to 4.5% fiscal deficit in FY26, bond yields could ease too.
Index-inclusion and growing exports can offset slowing capital flows.
- A major challenge for India, as for all economies with current accounts in deficit (CAD), is the crowding out caused by a sustained high fiscal deficit in the US.
- Due to quantitative tightening, USD supply is likely to remain tight, but growing nominal GDP due to higher fiscal deficits keeps local USD demand elevated.
- Capital flows to India slowed to ~2% of GDP in the year-ended Sep-2023 and have fallen further since.
- This trend will only worsen till it cannot. Improving services exports can, by FY26, potentially nullify India’s CAD, if growth remains near 7% and there are no large terms-of-trade shifts (like oil prices).
- The INR’s abnormally low volatility, thus, is likely to persist.
Strong corporate earnings growth to provide resilience to markets against risks to P/E.
- Corporate profit growth lagged nominal GDP growth over the last decade, but broad-based earnings growth in recent years has pushed profits to GDP sharply higher, and back to levels seen in 2011.
- The trend of earning cuts has reversed in recent years, and a strong earnings growth estimate for FY25/26 will allow 3-4% roll-forward gains every quarter.
- Elevated UST yields are likely to pressure P/E ratios, but steady and unintended domestic inflows will keep India’s premium to global markets high.
- Market may go through a time-correction, with strong earnings providing resilience to gradual P/E decline.
‘Outlook 2024: India resilient in a growth-challenged world – Authored by Neelkanth Mishra, Tanay Dalal, Prateek Ancha; December 07, 2023, Axis Bank Ltd.
(Read the full report here ).
