India’s domestic demand to the fore

Domestic demand is likely to trump exports in supporting growth in rest of the fiscal year.
Group Research, Radhika Rao10 Nov 2022
  • Domestic drivers are likely to trump exports in the coming quarters
  • Festive boost and persisting pent-up demand have helped the momentum
  • Indicators might turn mixed thereafter
  • Base effects will mellow growth prints beyond the spurt in Jun22 quarter
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Domestic demand is likely to trump exports in supporting growth in rest of the fiscal year. We discussed external trade in India’s evolving trade dynamics as global growth outlook moderates. The economy expanded on sequential seasonally adjusted basis in the Jun22 quarter, besides the year-on-year pace of 13.5% yoy magnified by base effects. A receding low base is expected to mellow growth prints beyond the spurt in Jun22 quarter.

Better confidence/ sentiment data has been accompanied by firm real outcomes. Consumer and business confidence indices have fared well in recent months, not only in the short-term but also in terms of outlook. Most proxy private consumption indicators, especially urban demand, held up well in the quarter, with labour markets on the mend (pick up in industry and service sectors).

Data including real credit growth, automobile sales (34% yoy in Sep22 Q vs decline in Sep21 Q), passenger traffic and indirect tax collections (especially GST), fared better than comparative period year ago. Indications are that rural farm consumption lagged this upmove, as nominal as well as real agri wage growth eased from last year’s levels. Above normal rainfall at the southwest monsoon would likely help through higher incomes, as the kharif crop is marketed between October and November. Erratic showers in few states and its impact on crop yields will however hinder a broad-based pick up in farm returns across states. Non-farm incomes by comparison likely benefited from positive backward linkage with urban manufacturing and industrial activity. Notably, non-farm sectors generate higher income to the workers over the farm sector in rural areas(2x), but these are still lower than the per worker income in the urban areas.

Industry activity also likely improved as reflected in successive expansionary PMI–manufacturing readings, in contrast to a sharp correction in export-oriented and tech heavy North Asian economies, including South Korea and Taiwan.

Capacity utilisation rates have also risen, as well as strong pick up in capital and construction output, electricity generation, cargo traffic (7% rise in average Sep22 Q vs year before), auto production etc. Year-to-date government capex disbursements (49.5% yoy in 1HFY23) is also higher than current expenditure, backstopping investment activity. Pre-festive restocking demand is expected to be other catalyst for trend improvement. While firms have partly passed on higher prices, encouragingly, the recent survey IIM Ahmedabad’s Business Inflation Expectations Survey (BIES) registered signs of moderation in cost pressures faced by firms – shifting from very significant cost increase (over 6-10%) to moderate cost increase (3.1% to 6%).

Services are likely to receive a hand from pick up in PMIs, real credit growth, freight traffic, higher deposits (adjusted for inflation), fiscal spending (i.e., revenue expenditure minus interest payments and excluding subsidies) which ticked up in September.

In rupee terms, export growth eased to 13% yoy in the Sep22 quarter just as imports also moderated from the Jun22 pace, helping to slightly narrow the scale of deterioration in the trade deficit from the corresponding quarter year ago. As a counterbalance, service trade surplus rose by over 30%yoy in Jul-Sep22, lifted 34.5% rise in service exports. 

Pulling these factors together and signals from our GDP Nowcast model for India points towards a quarter-on-quarter pick up in 2QFY23 (3Q22) growth, with the headline likely to register mid-6% handle. This marks the strongest growth print amongst the Asian universe under our coverage, for which the Sep22 Q data is already out. Passage of reopening gains and festive boost is likely to result in a more mixed tone in second half of FY23.

For the year

Domestic tailwinds by way of the reopening boost, followed by pre festive buoyancy and restocking demand have been key drivers of first half growth this fiscal year. In the second half, outcomes are likely to be more mixed.

While persistent pent-up demand will help at the margin, after a sharp run-up in household savings in FY21, the trend is back towards normal (pre-pandemic) levels, tracking the pullback in households’ financial assets on the back of a reduction in bank deposits.

This also coincides by a sharp pickup in retail credit, with personal loans registering the fastest rise amongst the major segments for good part of 2022. Housing loans make up more than half of the personal loans, followed by vehicle credit, whilst unsecured loans (credit card outstanding) make up ~5% of total outstanding. With moderation in financial savings, higher credit uptake might be channelled to finance excess spending needs.

We maintain our FY23 growth projection at 7% yoy and are mindful of a passage of pent-up demand locally besides, a more challenging external environment next year. Global growth is expected to slow markedly in US, Europe, UK, and China. As we discuss in India’s evolving trade dynamics, nominal exports carries a strong positive correlation with the demand-side driver i.e., global imports, with a slowdown in the latter to weigh on trade performance, with some tail-end impact on private investment cycle as well. Lagged impact of (global and domestic) monetary policy tightening, as well as less conducive liquidity conditions are likely to be reflect next year.

Two upcoming catalysts will be watched with interest. Firstly, the direction of the upcoming Budget in February. Inferring from the authorities’ preference for supply side push towards infrastructure and manufacturing, we expect a pro-growth bias to underpin allocations. This might also help provide the necessary impetus to the second catalyst, that is private sector investments, as leverage levels have corrected, margins could find relief from easing input price pressures, and government’s structural policies take root, as a counter to the cloudy global outlook.  

In an upcoming piece we will discuss key thrusts by the authorities that are likely to emerge as medium-term pillars for the economy to improve trend growth.

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Radhika Rao

Senior Economist – Eurozone, India, Indonesia

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