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India’s real GDP growth rate is likely to moderate marginally to 6.3 per cent in 2024 from estimated 6.4 per cent growth for 2023, according to a report from Goldman Sachs.
However, it is likely to be a tale of two halves, the report said. “Subsidies and transfer payments as we head into the general elections in Q2 2024 will likely be the growth driver in the first half. Post-elections, we expect investment growth to re-accelerate, especially from the private side,” Goldman Sachs said.
“While we expect the government to continue its focus on capital spending, given the medium-term fiscal consolidation path, the rate of growth in capex will likely decrease from next fiscal year,” the report said. Risks around the growth outlook are evenly balanced in our view with the main domestic risk emanating from political uncertainty with elections approaching in Q2 2024.
Goldman Sachs said repeated supply shocks along with stable growth are likely to keep inflation above the central point of the Reserve Bank of India’s (RBI) target of 4.0 per cent in 2024. “We forecast headline CPI inflation to decline to 5.1 per cent year-on-year (average) in 2024, above the RBI’s and consensus forecast of 4.7 per cent year-on-year, from an estimated 5.7 per cent in 2023,” it said. “We expect the government to intervene through subsidies or other measures to keep a lid on food prices in an election year. While core goods inflation declined in line with our expectation in 2023, the decline in core services inflation took us by surprise, especially given resilient growth,” it said.
Going forward, core inflation is expected to decline to 4.5 per cent year-on-year (average) in 2024 from an estimated 5.1 per cent in 2023. Somewhat elevated inflation relative to target will limit the room for monetary easing.
“We forecast the RBI to cut only 50 bps to 6.00 per cent by early 2025. Our US economics team forecast the easing cycle to start in Q4 2024, and forecast a higher neutral rate for the Fed at 3.50 – 3.75 per cent, above the central bank’s current estimates of long-run sustainable levels,” it said. The “higher-for-longer” global scenario and elevated inflation domestically will mean continued hawkish guidance and tight banking system liquidity from the RBI until the Monetary Policy Committee (MPC) feels confident about inflation aligning with the 4.0 per cent target, Goldman Sachs said. Higher oil prices, slower growth in trading partners, and steady domestic growth is likely to increase the current account deficit by 60 bps to 1.9 per cent of GDP in 2024.
“While services exports have peaked (as a share of GDP) in our view, they will continue to cushion a wide goods trade deficit in 2024. Foreign portfolio inflows from India’s inclusion in a global bond index should help fund the current account deficit,” Goldman Sachs said.
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“Over the last two years, Indian policymakers deftly managed a difficult combination of multiple commodity (food and oil) supply shocks and high Fed funds rate,” it said. They did so through a combination of monetary tightening, using fiscal policy to absorb some supply shocks, and judicious use of forex reserves to maintain a stable currency.
Macro-economic resilience in recent years aided India’s inclusion in the JPM GBI-EM Global Diversified Index (beginning June 2024), and could prompt passive inflows of around USD 25-30 billion over the scale-in period.
“With India benefiting from regional supply chain diversification, we expect continued direct investment inflows, although capital inflows will likely remain muted globally in a high interest-rate environment. Overall, we think the current account deficit should be comfortably funded next year,” Goldman Sachs said.
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