From a macroeconomic perspective, the month of November has so far been rather cheerful, and may well end on a positive note when the GDP numbers for India are released for the second quarter.
In global geopolitics, positive signs have emerged from West Asia, where Israel and Hamas are reported to have agreed to a short ceasefire. Another positive development has been US President Joe Biden and Xi Jinping, the President of China, holding a summit and discussing various global and bilateral issues including the West Asia situation, Iran, Taiwan, climate change and military communication. Despite there being no joint statement or formal cooperation declaration, the summit still managed to send a positive and important signal that cooperation can bring benefits to a nervous world.
On the economic front, a positive surprise has come from the recent inflation prints in the developed world. The US consumer price index based inflation stood at 3.2 per cent in October, down from 3.7 per cent in September. The print provides the Federal Reserve with evidence that its battle against rapid inflation is indeed working, even if with a longer lag. Alongside, inflation in the European Union also dropped sharply to 2.9 per cent from 4.3 per cent the month before, below the consensus expectations of 3.3 per cent. To put this
in perspective, inflation stood at 10.6 per cent a year ago.
Not surprisingly, bond yields have eased globally and equities have soared as these price readings have raised hopes that the fight against inflation may have finally reached an end. Despite the Fed’s assertions that the central bank is yet to even consider lowering rates, markets see a very high chance that the Fed will hold rates steady again at its December policy meeting and have begun to price in cuts as early as March, according to the CME FedWatch Tool.
In India too, retail inflation eased by 10 basis points to 4.9 per cent — a four-month low. Core inflation eased by 30 basis points to 4.2 per cent. The wholesale price index declined 0.52 per cent compared to the same period last year, marking the seventh consecutive month in negative territory, imparting relief to producers via softer input prices. Global crude oil prices have continued to soften and are seemingly staring at a bear market. The West Texas Intermediate is down around 20 per cent from a high in September.
The festive season also ended on a positive note. According to the Confederation of All India Traders (CAIT), retail markets in India saw record trading of Rs 3.75 lakh crore during this festive season. Add to this an additional trade of Rs 50,000 crore during the remaining festivals and the signals are encouraging.
There are enough hints that the official GDP estimates for the second quarter to be released by the Central Statistical Office at the end of the month may reveal that the economy has grown faster than the 6.5 per cent figure expected by the RBI. Quite a few of the high frequency indicators such as e-way bills, GST collections, credit growth, electricity consumption, and other mobility indicators suggest that healthy private consumption and factory output, robust services activity, and front-loading of government capital expenditure may eventually push the growth number for the second quarter closer to 7 per cent.
The central government has spent around Rs 4.9 lakh crore or 49 per cent of its FY24 budgeted capex in the first half of the year, which is 43 per cent higher than the Rs 3.42 lakh crore spent in the same period last year. While the second quarter print may seem lower in comparison to growth in the first quarter, the more important point is that the economy is still going to record notable sequential growth. In the current context, where statistical bases have distorted meaningful inferences from year-on-year numbers, it is important to not lose sight of the sequential changes, including in absolute output growth.
While the economy has indeed maintained the growth momentum, going forward there are several areas that require close monitoring. In a more shock-prone world, the country needs even more sound macroeconomic fundamentals, with little room for policy errors.
First, oil prices need to be carefully watched with the OPEC+ leaders set to review production targets later this month. The grouping will want to defend the prices going forward and they could do that by leveraging their pricing power and making sure that the supply deficit is maintained via extension of supply cuts.
Second, the external demand environment still remains very feeble and world trade growth remains at historic lows, with few signs of improvement. In fact, it is projected to decline from 5.1 per cent in 2022 to 0.9 per cent in 2023.
Third, the domestic focus will pivot towards general elections after the state elections results are announced. There is a need to closely monitor the impetus towards new ordering activity by the government and whether the private sector gets into wait-and-watch mode until clarity on the political front emerges.
Lastly, monetary and fiscal policy coordination needs to continue. Unlike in the US and other parts of the world, thus far, both the RBI and the finance ministry have carefully navigated a tricky environment, managing the global risk and the persistent inflation threats. The government also seems to be on track to achieve the fiscal deficit target of 5.9 per cent of GDP and will do well to reiterate its intent on staying the course.
India’s relative global standing this year has been bolstered by its economic resilience as well as its macro and financial stability. This needs to be preserved at all costs to ensure that the growth momentum sustains, helping retain India’s standing in a world where large parts are witnessing sluggish growth.
The writer is Group Chief Economist, L&T. Views are personal