Like each of the preceding three years, 2023 turned out to be rather eventful.

The global economy trundled along through the year, navigating multiple speedbreakers including the effects of rapid monetary tightening, as well as the spillover and outbreak of fresh geopolitical conflicts.

Amidst this gloom and doom, India’s economic momentum strengthened, and offered positive surprises.

At the current juncture, we have pencilled in a GDP growth of 6.2 per cent for the next fiscal, only slightly lower than our estimate of India’s medium-term potential growth of 6.5 per cent.

Firstly, we expect urban demand to remain robust in FY2025, amid elevated forward-looking consumer sentiments. However, the recent tightening of norms for personal loans and credit cards by the RBI is likely to impact credit growth for these segments, which could weigh on discretionary consumption of urban households.

On a gloomier note, owing to the sharp fall in kharif output and subdued prospects for the rabi crop, ICRA expects little-to-no growth in the agri-GVA in H2 FY2024. This is expected to dampen rural sentiments and consumption in H1 CY2024, until there is some visibility around the outcomes for the next kharif crop. Nevertheless, a normal and well-distributed monsoon would be crucial in 2024, and growth outcomes for the rural economy for FY2025 would be increasingly sensitive to the same.

Export gloom

Alas, the weakness in exports seen through FY2024 so far, is likely to persist in early-FY2025. The IMF expects growth in world output to dip to 2.9 per cent in 2024 from 3.0 per cent in 2023.

Consequently, we have pencilled in continued weakness in India’s exports in H1 FY2025, followed by an improvement in H2. Overall, exports are not expected to contribute significantly to GDP growth in FY2025, unlike in FY2022 and FY2023, when they added 5.5 and 3.0 percentage points (pp) to the growth print, respectively. However, global growth surprises could alter the trajectory of India’s exports.

Capex conundrum

Moving on to public and private investments, India has seen a construction boom over the last one-and-half years, aided by a sharp expansion in government capex which has supported public infrastructure, and a robust housing demand.

This is reflected in the double-digit growth in cement output and finished steel consumption during this period. Construction has added 0.8 pp to the GVA growth print in FY2023 and H1 FY2024. The sustenance of this trend remains key to support growth in FY2025.

The government’s capex, which recorded a vigorous growth in the last two years, is likely to slow down in the run up to and during the period of General Elections, thereby weighing on GDP growth in this period.

Notwithstanding this event-led slowdown, we believe that the government would not be able to expand its FY2025 capex at a pace similar to that seen in FY2023 and FY2024, without deviating from the fiscal glide path.

Encouragingly, home sales have surged by over 20 per cent across the last six quarters, and growth is set to optically weaken in FY2025 from these levels. This could also weigh on the pace of expansion in construction activity and investment demand.

However, we remain relatively optimistic around the pick-up in corporate capex, once the uncertainty owing to the General Elections dissipates.

Inflation to soften

In terms of the other major macros, presuming a normal monsoon, we expect the CPI inflation to soften in FY2025, setting the stage for a modest rate cut cycle of 50-75 bps to set in after August 2024.

We anticipate the post-election Budget to target a fiscal deficit halfway between the outcome for FY2024 and the medium-term target of 4.5 per cent of GDP for FY2026.

This will entail a combination of belt tightening on the revenue deficit side, the aforementioned moderation in growth of capex or more aggressive disinvestment.

Based on the presumption that domestic demand growth will outpace the global trend, we expect India’s current account deficit may widen slightly.

If global commodity prices strengthen excessively on the hopes of a revival in demand, they may nip the awaited monetary easing in the bud, which would effectively cut off the rally.

Overall, India’s current account deficit is unlikely to materially exceed 2 per cent of GDP and remain an arm’s length away from pressing any alarm bells.

All told, India’s macros are likely to remain in good health in 2024, an enviable position in the murky global arena.

The writer is Chief Economist, Head- Research & Outreach, ICRA