Opinion: What Lies Ahead For Economy In 2024?

There is a definite air of optimism as we begin 2024; almost every economic parameter looks better than last year. It can be said with confidence that the economy is on a take-off mode in 2024, in the absence of any external or weather shock. Even if there is any external shock, the Indian economy has done well in the last two years and was buffered against two wars through the adept use of policy tools.

What lies ahead?

All attention will be on the national election and the outcome. Many believe the result is more or less known, but investors may like to wait before taking any fresh action. So, till May, when the elections are due, it will be business as usual. The government has indicated that there will be no surprises in the budget, which will be a vote on account. The full budget is like to be presented only around June, along with new policies. Going by the track record of the current dispensation - its commitment to fiscal prudence is known - there will be movement along the glide path already laid down.

Let us crystal gaze into what the numbers could look like in 2024-25. GDP growth is likely to be closer to 7%, after the 6.5-7% growth recorded for FY24. The conditions for sustained growth are in place. Two missing links that will warrant a change in direction are rural consumption and private investment. The former has slowed due to the unfavourable kharif crop and possibly lower rabi harvest this year. This should change.

Private investment has been concentrated largely in industries tuned to infrastructure and this may become broader in 2024. Companies are waiting for the elections to be over before taking a call, which is a habit now. This year will be exciting for private investment. In fact, the revival in rural demand will provide a push to capacity utilization in sectors such as two wheelers, FMCG, consumer durables and tractors, which should lead to higher investment. With a bit of luck the gross fixed capital formation rate, which is in the region of 29% of GDP, should be able to touch the 30% mark.

The second variable of interest is inflation. The RBI has already indicated that inflation will come down to 4% in July-September and then rise in October-December, but remain below 5%. This is significant because the industry is counting on repo rate cuts in the coming year. It looks like that the second quarter of the next fiscal or third of calendar 2024 will witness the start of the rate cuts. Here too, we must be moderate in expectations as there will probably be a cut of 50 basis points at most, assuming a normal monsoon. Decisions will be taken based on inflation numbers. What is certain is that the RBI will continue targeting 4% inflation and even 5% will be accepted only in the interim term.

Third, from the point of view of savers, the days of high interest rate on deposits will be over as any reduction in repo rate means lower deposit rates. Borrowers can be happy as almost 53-55% of borrowing is based on the external benchmark rate. Therefore, the balance will tilt towards the borrowers from deposit holders. This will pose a further challenge to banks as they compete with mutual funds for the savings wallet. The assets under management of AMCs has increased to closer to Rs 50 lakh crore this year. As the Sensex has been moving relentlessly northwards and scaling new peaks, it is but natural for savers to become investors, especially when interest rates come down.

Fourth, the stock market has behaved in a remarkable manner with corporate profitability improving sharply this year. Now with the economy expected to do better in 2024, which will go along with the performance of companies, valuations will be healthy, leading to a further rise in the stock indices. This, incidentally, has been a more global phenomenon and not restricted to just India.

Fifth, the currency will be another variable to watch. We have seen that the two factors which drive the rupee have worked in favour of a stronger currency in the last month. The first is the weakening dollar. This will continue as the Fed keeps lowering rates and the dollar becomes weaker against the euro. Second, the external fundamentals will tend to improve for us as the current account deficit shrinks. This has already been seen in Q2 of this year. More importantly, capital flows are expected to be buoyant, with an expected boost coming from the inclusion of Indian bonds in the global bond index.  Therefore, a stable rupee in the range of Rs 82-84 per dollar can be expected for the year.

2024 promises better economic tidings and more stability. This chain will also help to create more jobs, which has been the Achilles heel when it comes to consumption. If we do manage to cross the 7% level this year, at a time when the global economy takes a breather, India can be well set to move down the 8% path that will help accelerate the process of moving towards the $5 trillion economy.

(Madan Sabnavis is Chief Economist, Bank of Baroda and author of: Corporate Quirks: The Darker Side Of The Sun.)

Disclaimer: These are the personal opinions of the author.