K-Shaped Recovery Says Hi!

India is considered resilient to a global economic slowdown. But its spillover effects are taking a toll on the growth story.

The Indian economy for the third quarter of FY23 has grown at 4.4% and Rs 40.18 lakh cr. The share of gross fixed capital formation in GDP has fallen from 34.2% to 31.8%, while that of private consumption went up above 61%. Looking from the production side, the manufacturing sector showed a decline of 1.1% (YoY) while trade, hotels and other services increased by 9.7%. The construction and utility sector also grew above 8% (YoY). The second advance estimate pegged an annual GDP growth rate of 7% in FY23.

Now let’s look at the story behind these numbers.

Forward-looking surveys like PMIs have cooled down in recent times, be it services or manufacturing. Production of both consumer durables and non-durables has taken a hit, although capital goods production and imports are in a better situation. Overall, IIP is on a downward trajectory.

High inflation along with costlier loanable funds are impacting consumption by price-sensitive Indian consumers (Aka lower and middle class). This is visible from the fact that the FMCG companies witness only value growth and volume growth is tepid to nil. Firms in consumer discretionary sectors like QSR (Quick Service Restaurants), paints, adhesives and retail are also humming a similar beat.

Rural demand is recovering at the pace of bullock kart. Now kharif productions are good but last year’s erratic monsoon impacted the farming sector. This year, there is fear of El-Nino. The economic survey indicated that high inflation led to negative growth of rural wages in real terms. The budget for MGNREGA declined by 17.8%. Rural unemployment is close to 6.5%.

In urban areas also layoffs by IT and startups have dimmed the mood. Urban unemployment is above 8.5%. No wonder consumer sector firms are facing strong headwinds

Meanwhile, sectors catering to the higher end of strata like hotels and tourism, sin goods, 4 wheelers performed better. Even in the auto sector sales of 2-wheelers are yet to recover. K-shaped recovery says hi!

Pent-up demand has also cooled off. The global economic slowdown is impacting exports.

Strong US economic data, increased prospects of Fed continuing its hawkish actions for longer (Terminal fed fund rate around 5.4% or even higher is expected). This is putting continuous pressure on the rupee (RBI’s efforts are preventing it to breach a level of 83 against the dollar) and Indian bond yields. This means a higher cost of borrowing even for the government which is looking to borrow Rs 15.4 Lk Cr in FY24. Current inflation is 6.5% and RBI has a target of bringing it close to 4%.

A cocktail of looming inflationary pressures and slowing growth is making life difficult for RBI and the government. Prof Verma of IIMA and member MPC has called India a fragile economy. In the medium term government’s structural reforms are likely to have a positive impact but dark clouds are looming in near future. GDP data for Q3 FY23 also narrated a similar story.