India’s real GDP growth in the December quarter was 8.4% y/y and for FY24 is estimated at 7.6%, up from 7.3% previously. The FY25 union budget last month signalled faster-than-expected fiscal consolidation and pegged central government fiscal deficit at 5.8% of GDP in FY24 and 5.1% in FY25, taking the total public sector deficit below that pre-pandemic. The current account deficit was 2% of GDP in FY23 and may be below 1% in FY24. Capital inflows have picked up on news of Indian bonds’ inclusion in global indices. As India’s macroeconomic situation turns favourable, the question now is about a revival in the private investment cycle. We see positives like higher investment in some sectors, government’s focus on capex to crowd in private investments, cleaner corporate and bank balance sheets and buoyant real estate investment by households. However, investment-related macro data is still quite moderate and investment outlook of manufacturing companies seem mixed. Importantly, we need a revival in the lackluster private consumption demand.
Investment indicators - moderate momentum
Growth in imports of capital goods (i.e. machine tools, machinery, transport equipment, electronic goods and project goods) has been easing for some time. Even within this, there is skew towards the major import item of electronic goods. Growth in capital goods imports including electronic goods has been in the mid-single digits so far this financial year but, excluding electronic goods, it has been negative (Figure 1).
Sequential momentum in capital goods production has been negative in seven months, out of nine, so far this financial year (Figure 2). Momentum in infrastructure and construction goods production also has been sluggish.
Value of new projects announced fell sharply in the September quarter and increased only mildly in the December quarter. In fact, number of projects fell in the December quarter (source: CMIE).
RBI manufacturing survey - New order book & inventory strong but capacity utilisation flat & average sales moderating
As per the survey, manufacturing companies’ inventory has been picking up, and Work In Progress (WIP) inventory spiked in the September quarter, likely because Order Book (both new and pending orders) continues to be strong and is rising (Figure 3). Even in the recent manufacturing-PMI surveys, new orders are reportedly strong. Capacity utilization, average for all the manufacturing companies surveyed, recovered well post-pandemic but has been flattish just under 75% more recently. Average sales have moderated well below its September 2022 peak (Figure 4).
However, the question on how broad-based private investments are and whether certain sectoral investments are driving the aggregate numbers remain. Could it be that the sectors in which public capex is heavy (like roads and railways) or those which had been under-investing previously and were thus due for replacement/maintenance capex (like steel and power) are now driving the overall numbers?
FICCI manufacturing survey - Capacity utilisation inched down and investment intention eased
The FICCI survey of manufacturing companies (latest three rounds of data in July 2023, November 2023 and February 2024) suggest order books are strong even here but average capacity utilization has been moderating, albeit mildly. More importantly, the share of respondents planning investments and expansions in the six months ahead has eased more recently. This number can be a bit volatile owing to sectors and companies responding in each round of the survey. However, this needs to be watched as it does not suggest aggregate optimism on the investment outlook. Further, change in capacity utilization across surveyed sectors paints a mixed picture (Figure 5).
FICCI Economic Outlook Survey - Private capex momentum not yet firm or broad based
Participants in the FICCI Economic Outlook Survey from October 2023 noted the government has been doing the heavy lifting on capex and early signs of rising private capex were visible because of crowding-in effect. Therefore, this momentum in private capex has been primarily led by the non-industrial (infra) sector and investments were concentrated in sectors like roads, railways, iron & steel, cement and chemicals.
However, it noted a firm impetus in private investments remains elusive, full-fledged momentum will take some more time to build in and any further recovery in private investments will be led by a pick in consumption activity, both domestic and external.
Participants felt a continued focus on ease of doing business, physical infra creation and a stable policy environment will support and help sustain private capex. Other suggestions included further streamlining compliances, simplifying tax/legal systems, encouraging export-oriented manufacturing, leveraging on changing global trade patterns/global diversification, establishing industry specific manufacturing hubs with complete eco-systems.
This underscores the point private investments are indeed occuring in certain sectors, likely the ones where government presence is heavy. For a broad private capex cycle, one key factor is private consumption demand.
Private consumption - still languishing
Private consumption accounts for ~60% of our nominal GDP. Pre-pandemic, real GDP grew 3.9% y/y and domestic private consumption grew 5.2% in FY20. In FY24, private consumption is estimated to grow 3%, down from 4.4% previously, although headline real GDP growth is estimated at 7.6%. Real private consumption growth has lagged GDP growth, by quite a margin, for over a year (Figure 6).
Agriculture value added growth, particularly in the last 1-2 years, has been moderating. It contracted 0.8% y/y in the December quarter and is expected to grow only 0.7% in FY24, the lowest since FY16 (Figure 7). The sector has faced frequent erratic weather patterns, impacting output of cereals and perishables. Last year was also hit by an El Niño and south-west monsoon season rainfall distribution was sub-optimal. Thus, rural wage growth has been moderate and, on a real basis after subtracting rural inflation, turned positive after about a year towards the end of 2022 but has been moving sideways in the last one year. Within rural wages, non-agri wage growth has been much weaker (Figure 8). Even within agri wages, ‘core-agri’ wage growth (growth in wages of only the main agri jobs of ploughing & tilling, sowing including planting, transplanting & weeding and harvesting, winnowing and threshing) has been weaker.
Another noteworthy data is household net financial assets flow. This, as a share of GDP, declined sharply in FY23 (Figure 9). Households accounted for ~40% of nominal and real Gross Fixed Capital Formation in FY22. Reports, based on registrations in cities & listed real estate companies’ sales, suggest household investments in real estate have been strong. With net financial assets flow down in FY23 and wage growth being moderate, it is possible households may not be able to continue to drive these investments at the same pace.
On the external front, global growth has been surprisingly resilient. IMF’s World Economic Outlook from January estimates 2024 world GDP to grow 3.1%, up from 2.9% estimated previously and same as in 2023. However, given the uncertainties from potential lagged impact of monetary policy tightening, fading impact from fiscal & excess savings, lower wealth effect and even a possible opening up of the K-shape (where consumption of lower income households falls relatively more), we need to keep tabs on external private consumption demand.
Positive macroeconomic backdrop but waiting for private consumption revival
India’s economic output has been strong, CAD has stayed moderate and capital inflows have picked up due to Indian bonds’ planned inclusion in global indices. What happens now when public sector fiscal consolidation steps up? Can private capex take on the mantle? Positives include continued focus on capex by the central government, further maintenance or replacement capex in some sectors, strong aggregate manufacturing sector order books, buoyant real estate investment by households, cleaner corporate and bank balance sheets and likely easing of funding cost and banking system liquidity ahead.
However, investment related macro data remains moderate. Surveys of manufacturing companies suggest capacity utilization, after picking up, has been flat more recently and its change across sectors paints a mixed picture. Investment intentions have also moderated of late. Most of this data is for listed or large enterprises but previous year (FY23) manufacturing output has also been revised down (+1.3% y/y to -2.2%), likely reflecting the weakness in informal sector data included in revisions. Most importantly, private consumption growth has been weak for quite some time, in line with growth in the agricultural sector and rural wages. A good rabi crop season harvest and a normal monsoon season rainfall with good spatial and temporal distribution could provide some fillip. Uncertainty around global growth remains high.
This suggests India’s macroeconomic backdrop has turned favorable. Public capex, to crowd in private investments, is noteworthy and private investments are rising but concentrated in certain sectors. For a meaningful and broad-based private investment cycle to kick in, we need a similar revival in private consumption.
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