Economy set to slow in FY24. How bad can it get?

Post-pandemic growth will be mainly driven by infrastructure investment, which the government has been pushing, with other drivers having a much smaller influence.

India, the fastest-growing G-20 economy, is unlikely to emulate the past soon with a slowdown looming in the financial year that will start April 1, according to economists.

Recent gross domestic product data revision, going back three years, has boosted growth. The economic contraction for the pandemic-hit year of FY21 was upgraded to 5.7 percent from 6.6 percent while growth for FY22 was raised to 9.1 percent from 8.7 percent. The government projects growth for FY23 at 7 percent and for FY24 at 6.5 percent.

“For India, the technical rebound from deep contraction has run its course, and we now expect the country to struggle to even get back to the average growth rate of FY15-20, i.e. 6.7% yoy, let alone the 7.3% yoy average growth in FY05-10,” said Kunal Kumar Kundu, India economist at Societe Generale.

“For FY24, India will likely record growth of 6.0% yoy, and yet, that would still make India the fastest-growing G20 economy.”

India’s economy needs to grow at a much faster pace given the size of its population and the country’s current stage of development, Kundu said.

Post-pandemic growth will be mainly driven by infrastructure investment, which the government has been pushing, with other drivers having a much smaller influence.

A large numbers of micro, small and medium enterprises have fallen by the wayside, with multiple disruptive events forcing them to the brink. The less endowed workers have also lost jobs and hope, the economist said.

“This means the recovery from the crisis of confidence of those at the bottom of the pyramid and slightly above will take a much longer time, delaying still further India’s ability to grow at 8.0% and above – and this level is still below the double digit-growth rate recorded by the more populous China for decades. Without this recovery, we see little probability of India reaping the full potential of its demographic structure,” Kundu said.

Estimates of growth for the next fiscal year are even lower than the 6 percent that Societe Generale predicts.

For instance, Motilal Oswal Financial Services expects GDP growth of 5.2 percent for FY24 and 5.6% for FY25.

“There is no doubt that 7% real growth in FY23, following a 9.1% growth in FY22 is impressive and better than our earlier forecasts. However, if achieved, it would imply a CAGR of 3.2% over the past three years (FY20-FY23), compared to 5.7% growth witnessed over FY17-FY20,” the brokerage said.

“MOFSL has always been restrained about India’s future growth potential in the post-COVID period, which reflects in MOFSL’s forecast of just 5.5% average growth over the next two years,” it added.

Not all bad news

Still, some economists have upgraded GDP forecasts.

Take Barclays, which believes that global events -- both in the form of rising financial stability risks and the topping out of the synchronised monetary policy cycle -- will provide a more conducive backdrop for India.

The bank recently raised its GDP forecast to 6.3 percent for FY24 while keeping FY25 projection unchanged at 6.5 percent.

“With domestic services demand holding up and current account deficits becoming smaller, our belief that India can generate at least 6% growth over 2023-2024 has strengthened,” Barclays Chief India Economist Rahul Bajoria said.

“These growth rates are consistent with macro stability being preserved, and we do not see scope for demand-led price pressures to build up materially from here on.”

The house sees scope for sustained growth outperformance on account of India’s export capacity being built up, as evident in the improving goods and services deficit.