India economic outlook, August 2024

Decoding the fourth quarter of fiscal 2023 to 2024

India’s GDP grew 8.15% YoY over fiscal 2023 to 2024, with a sharp growth of 7.8% in the fourth quarter of 2023, beating the government’s second advanced estimate of 7.6% and Reserve Bank of India’s (RBI) estimate of 7.3%. Fourth-quarter economic activities pointed to three interesting trends: improvement in private consumption, exports, and manufacturing.

Firstly, private consumption spending fared better last year than reported earlier. There were upward revisions to the third-quarter data, suggesting consumers spent more generously in the quarter of festivals and the Cricket World Cup than previously believed. Third-quarter GDP growth was revised to 8.6%, up from the earlier estimate of 8.4%, on the back of a 50-basis point upward revision of private consumption spending. That said, private consumption growth remained capped at 4.03% over fiscal 2023 to 2024, owing to modest growth in the agriculture sector and persistent inflation that weighed on rural demand.

Secondly, Indian exports surged by an impressive 8.1% YoY in the fourth quarter—the highest this fiscal year. Merchandise exports improved remarkably that quarter (even though the quarter’s performance could not prevent annual merchandise export growth from contracting). Notably, high-value manufactured goods like pharmaceuticals, chemicals, engineering products, and electronics achieved record export levels this quarter, propelling overall growth in merchandise exports in the high value-added segment. This positive trend bodes well for India as it aims to strengthen its integration into the global value chain and increase its exports to US$2 trillion over the next six years. Growth in the traditional basket of exports, however, continued to decline (figure 1).

And finally, 8.9% growth in manufacturing that quarter points toward sustained momentum. The index of industrial production also hinted at a strong revival in the sector.

A few other factors affecting the growth numbers observed in the last quarter are:

• Modest investment: The momentum in gross fixed capital formation slowed to 6.5% YoY last quarter reflecting a temporary weariness due to national elections in India and other major countries, the escalation of geopolitical tensions in Central Asia, and the economic slowdown in China.
• Demand exceeding supply: The divergence between GDP and GVA (gross value added) narrowed marginally last quarter to 1.5% relative to the previous quarter’s 1.8%, but the gap continued to remain high. This possibly indicates that the demand side (as measured by the expenditure approach) is growing faster than the supply side (denoted by the production approach).
• Fiscal deficit defying expectations: The fiscal deficit narrowed to 5.63% of GDP, lower than both initial budget estimates (5.9%) and revised estimates (5.8%).

India’s near-term outlook

The robust growth in fiscal 2023 to 2024 and the continuity of the government at the center after the elections have increased confidence in the domestic economic fundamentals and buoyed India’s outlook. We expect India to grow between 7.0% and 7.2% in the coming fiscal year (2024 to 2025) in our baseline scenario, followed by 6.7% and 7.3% (admittedly, a much wider range due to uncertainties around several assumptions) in the subsequent years (figure 2).

Following a period of uncertainty in the first six months of the year, we believe India will see very strong growth in the second half. Some of the key contributing factors would be the continuity in domestic policy reforms, reduced uncertainties in the United States after elections, and a more synchronous global growth in a low inflation regime. Improved global liquidity conditions (as central banks in the West ease their monetary policy stance and cut policy rates) would improve capital flows and drive higher investments, especially in the private sector. A synchronous global economic recovery next year will likely help improve exports.

The growth range predicted for next year is higher, as these uncertainties can swing economic activities quite distinctly. That said, we will continue to see the difference between actual GDP and no–COVID-19 levels⁶ progressively narrowing as growth picks up pace (figure 2).

(For more on our baseline and pessimistic scenario assumptions, see “Key assumptions for Deloitte’s projections”.)

Inflation concerns are likely to fade as we expect food price–driven pressures to ease in the latter half of the year. However, risks of intermittent and spatial monsoons could lead to higher food prices for more extended periods of time. Besides, stronger growth may also keep pressure on inflation as demand outpaces supply. We expect inflation to slowly revert to the RBI’s target level of 4% from early next year and remain within its comfort value over the forecast period (figure 3).

Preparing for a new generation of consumers

In our April edition, we highlighted the prominent shift toward higher spending on luxury and premium goods and services, as well as the implication of a growing middle-income class on prospects of this category of spending.⁷ For this edition, we conducted an in-depth analysis of the data from the HCES released in June 2024, identifying spending categories across various Indian states.

Urban households have outspent their rural counterparts over the past decade, with the former spending an average of INR2,686 higher than the latter monthly in 2022–2023 (up from INR930 back in 2009–2010. That said, rural spending patterns within food and nonfood categories have quickly caught up to those of urban populations (figure 4).

• A shift toward a protein-based diet: Within the food category, there is a discernable shift away from carb-based food toward a more protein-rich diet, particularly in rural areas.
• Processed food and beverages are in demand: The share of processed food and beverages is the highest in both rural and urban populations, suggesting a broad-based change in consumer preference for convenience and variety in food choices. Since this industry is a major contributor to economic growth, employment, and tax revenues, it makes sense for the government to focus on manufacturing processed food products.
• Discretionary goods and services demand increases: In the nonfood category, spending on services (including conveyance) has been the most, followed by spending on durable goods (that includes mobiles, electrical products, and vehicles, among others).
• The spending share on health and education is a concern: The declining spending share on education and the rising share of spending on health are a concern. Higher spending on health is resulting in higher financial burdens for consumers, limiting their ability to spend elsewhere. At the same time, a reduction in the priority given to education in household budgets could impact future employability and add to disparities in income opportunities.

Changing spending preferences are creating new business opportunities

Rural spending preferences have immense potential to create demand for discretionary goods and services, especially durables and conveyance. Therefore, the revival of rural demand is key to sustainable growth in this segment. Since rising income leads to a more pronounced increase in demand for these items compared with demand for necessities such as food, it is obvious to expect businesses to target states with higher per capita income.

But more importantly, the other factor that decides market opportunities is how broad-based and mature the market is. States with tapering urban and rural spending gaps offer penetration-led volume growth to the country’s GDP. If increasing income in states results in a relatively equitable distribution and higher rural spending, businesses can tap into a larger proportion of the state’s population that resides in the rural areas. This gives businesses access to a large consumer base and a sustainable consumer spending demand, as compared to states with a widening gap. Consequently, businesses are able to:

• Focus on volume growth by tapping into the growing rural middle class and previously underserved rural markets for discretionary products
• Achieve greater economies of scale in production, distribution, and marketing, leading to more competitive pricing and further stimulating rural consumption of these products
• Create opportunities through innovative products and services, such as alternate financing options

Figure 5 shows the distribution of states across parameters such as per capita income and urban-rural consumption gap. Several states have improved the urban-rural spending gap, driven by rising income. These states hold the promise of a large consumer base in rural areas where preferences and consumption behaviors are changing toward nonfood spending categories.

State-wise consumption patterns also offer some interesting insights into the variation of spending across food and nonfood segments (figure 6) to businesses.

• Most states have been big spenders on consumer services including conveyance and entertainment, while the distribution of states’ spending on durable goods is scattered and lacks coherence.
• Demand for processed food has been among the highest in most states, suggesting a shift toward ready-to-eat options. Rapid urbanization, increasing women’s participation in the workforce, and marketing and availability are driving these changing dietary habits.
• When it comes to social spending, household spending on education and health is the least among most states in India. Some states have relatively higher spending on health such as Kerala and Punjab.

Government interventions will provide the much-needed thrust to consumer spending

India is primarily a consumer demand–driven economy, with private consumption accounting for above 60% of GDP. Therefore, sustained momentum in this key growth driver is pivotal.

• Address the high urban-rural consumer spending gaps: For broad-based growth, rising income must also be associated with a reduced disparity in consumption spending between urban and rural consumers. The government will have to address this gap in several states (as observed in figure 5) by improving access to resources and support for agricultural income.
• Allocate more towards health and education: There is a significant variation in household spending on health and education across different states in India.

o   Higher spending on health weighs on consumers’ discretionary spending power and can push more households below the poverty line. States with households spending a higher share on health will be required to increase public spending to reduce financial burden.

o   Some states have a very low share of household spending on education. Besides, the overall trend of a declining share of education is a concern for the bottom strata of the population, as it can lead to disparities in educational opportunities and outcomes across different regions and socioeconomic groups. States with a lower household spend on education will be required to have targeted interventions to enhance the quality of education and keep education inflation under check.

• Curb inflation and unemployment: Cumulative inflation and poor agriculture output have weighed on rural consumers more than their urban counterparts. Aspirational rural consumers would like to see affordability improve and the government will have to address inflation and create more employment opportunities that boost income.

The newly elected government—serving its third term—tabled its first union budget after elections on July 23, 2024. This time, its policy pivots were toward improving agriculture productivity and income, creating jobs for the youth, and in manufacturing, and addressing the longstanding challenge of access to finance for micro, small, and medium enterprises, among others. All these are likely to have a direct effect on improving supply, curbing inflation, and propping up consumer spending, especially in rural areas and among the middle class. In short, we believe that policy push from the government will help address many of the challenges mentioned above, and we will likely see reduced urban and rural spending gap in the coming years resulting in a sustained growth in overall private consumption spending from a larger consumer base.