Keeping the faith
Fired by the superlative performance of agriculture and continued resilience of construction and services, gross domestic product (GDP) growth in the fourth quarter of fiscal 2023 was revised to 6.1% from 5.1% estimated earlier. That lifted the growth number for full fiscal to 7.2%. The good news does not end here. The momentum in the first quarter of this fiscal is quite healthy, as expected by the Reserve Bank of India (RBI), which forecasts 8.0% growth for the quarter. As per S&P Global's Purchasing Managers' Index (PMI), both manufacturing and services remained robust in the first two months of this quarter. Between April and May, the manufacturing PMI was closer to 60, while for services, it was above that.
That said, we expect growth momentum to slow in the coming quarters as the global slowdown hits merchandise exports and the cumulative impact of rate hikes by RBIplays out in the current fiscal. India's merchandise exports have now contracted for four consecutive months. Inflation in April and May was much lower than what analysts and the RBI were expecting.
The RBI, while continuing with the pause on rates hikes and maintaining its 'withdrawal of accommodation' stance, communicated that it would continue the fight till inflation is aligned with the target of 4% on a durable basis. The RBI, therefore, appears to be in no hurry to cut rates. It prefers to wait and watch to observe the impact of its past rate hikes play out. Put another way, we see a rate cut only in January-March 2024, with a change in stance preceding that.
While the United States (US) Federal Reserve paused its rate hike streak, its dot plot suggests that more rate hikes could come this year. European Central Bank, too, is expected to continue with rate hikes due to sticky inflation. Rate cuts, therefore, are unlikely before 2024.
Amid generally positive tidings on the domestic economy front, tightening financial conditions globally are beginning to weigh on foreign direct investment (FDI) flows into India. Gross FDI flows have been trending up over the last two decades as the FDI regime was progressively liberalised. In fiscal 2023, FDI fell 16.3% on-year, in line with the trends observed during the period of global stress.
Interestingly, repatriation has also been rising over the years. For instance, in fiscal 2023, FDI into India ex repatriation was $41.6 billion, compared with a gross inflow of $70.9 billion.
Nevertheless, FDI has become the dominant form of capital inflows, accounting for 57% of the net financial flows in fiscal 2022, compared with 22.2% a decade ago. It is also financing a larger proportion of current account deficit (CAD) versus more volatile portfolio flows. A mix of factors, such as India's rising growth premium over other economies, incentive schemes such as the Production Linked Incentive, and diversification of supply chains will be positives for incoming FDI flows over the medium run.
