India Ratings hikes FY24 growth forecast to 6.2%, but sounds consumption warning

Even after the growth upgrade, India Ratings’ latest forecast remains lower than what the government and the RBI expect.

India Ratings & Research has raised its GDP growth forecast for India by 30 basis points to 6.2 percent for 2023-24, although it has warned that current domestic consumption levels "cannot hold for very long".  Speaking at the release of India Ratings' macro-economic outlook for the year, Principal Economist Sunil Sinha pointed out that while real wage growth of those in the upper-income bracket has been in double digits, people in the lower 50 percent of income bracket have seen negative real wage growth until very recently.

This is reflected in the consumption pattern: cars priced Rs 10 lakh and above have been in demand, while that for motorcycles has not grown at the same pace. Other areas where such a pattern includes air versus rail passenger traffic and luxury versus affordable housing, among others, Sinha said.

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"All this clearly indicates that while consumption demand at the aggregate level may be looking fine, at the disaggregated level there is a disconnect… Our worry is that this kind of consumption demand cannot hold for very long unless and until the consumption demand of the people who belong to the lower income bracket also rises," Sinha said.

"People in the lower income bracket mostly consume mass consumption items and that is where the consumption demand is likely to be more. From a longer-term perspective, that kind of consumption demand is imperative for the economy," he added.

Source: India Ratings & Research

The comments by India Ratings comes a few weeks after India's GDP growth surged to 7.8 percent in April-June, with private consumption growing 6.0 percent year-on-year as against a growth of 2.8 percent in January-March and 19.8 percent in April-June 2022. Following the release of the data on August 31, Chief Economic Adviser V Anantha Nageswaran had said anecdotal information from high-value fast moving consumer goods (FMCG) companies was indicative of growth not being concentrated in just the large metro cities but even in small towns and villages.

Savings-investment dilemma

With real income growth not enough to sustain consumption on its own, Sinha pointed out that households leveraging themselves by borrowing money. This is seemingly borne out in data released by the Reserve Bank of India (RBI) on September 18, which showed that households' liabilities were 76 percent higher in 2022-23 compared to 2021-22, with borrowings from commercial banks jumping 54 percent.

With households borrowing more, their net financial savings have fallen to the lowest – as a percentage of GDP – in almost five decades.

"Household savings going down also has larger implications for the economy because a large part of the investment comes from households, who are the largest savers. If their savings starts going down, then that much less capital will be available for investment," Sinha warned.

While there is "very little" the government can directly do to fix the situation, reducing inflation to the 4 percent target and improving growth should automatically help push up real wage growth.

Also Read: Deutsche Bank sees India's CPI inflation dipping below 3% in July 2024

According to Devendra Pant, chief economist at India Ratings, the gain to private consumption from higher real wage growth can be met from lower inflation.

"Our estimates suggest that a 1 percent increase in real wage rate will lead to 64 basis points increase in the GDP growth. Now, that 1 percent in real wage rate can be achieved if inflation is 1 percentage point lower," Pant said.

According to India Ratings, headline retail inflation may average 5.5 percent in 2023-24, allowing the RBI to "take a long pause" and maintain the repo rate at 6.5 percent.