– By HDFC Asset Management Company Limited

As per the quarterly GDP numbers released last week, the Indian economy grew at 7.6 per cent in real terms (i.e. growth after adjusting for inflation) in Q2FY24. This growth was higher than expectations set by economists, and cements India’s position as the fastest growing major economy in the world. The underlying economic data is corroborating the narrative – high growth is being led by increasing capital expenditure and government spend, along with a pick-up in the manufacturing sector. Higher GDP growth bodes well for corporate profits, and in turn, equity markets.

Among sectors, Manufacturing recorded the highest growth, at 13.9 per cent in Q2FY24 on a relatively lower base. In fact, it is encouraging to see momentum continue, with October and November manufacturing PMI (Purchasing Manager’s Index) at 55.5 and 56.0, indicating expansion over the previous months. In the long term, the relocation of the Global supply chain towards India and ASEAN countries (China +1) indicates acceleration over the coming decade. Construction has also been reporting high growth (10.5 per cent YoY in H1FY24), a corollary to higher GFCF. With expectations of continued government capex and pick up in private capex, the outlook for this sector remains positive.

While Indian Equity Markets are hitting fresh all-time highs, it is pertinent to note that other indicators such as the nominal GDP, corporate earnings, are also hitting all-time highs. Higher than expected growth in FY24 so far has improved the outlook towards economic growth for India, with several analysts mentioning upside ‘risks’ to their FY24 GDP growth estimates. RBI expectations for FY24 GDP growth stand at 6.5 per cent, higher than IMF expectations of 6.3 per cent. In fact, analysts have reported that they expect RBI to also increase its GDP growth estimates later this week with the announcement of the monetary policy. With the world undergoing a growth slowdown, India may find it difficult to sustain growth. Near term risks include global headwinds from higher interest rates, evolving geopolitical developments, crude oil prices, and the potential impact of El Nino on agricultural output and rural demand.

(The article is authored by HDFC Asset Management Company Limited.)

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