FORESIGHTS-SEP

Interest rates, Growth and China

As we enter the festive season, there are three key issues that I believe we need to monitor closely. While, at a broad level, corporate performance appears stable, these issues suggest potential headwinds. Firstly, interest rates. Jerome Powell, Chair of the Federal Reserve, recently signalled the beginning of interest rate cuts.

The Reserve Bank of India (RBI) may follow suit, albeit cautiously, with an expected reduction of up to 50 basis points in FY25. However, the concern lies in how effectively these policy rate cuts will be transmitted into actual reductions in bank lending rates. With the high credit-deposit (C-D) ratio across the banking sector, banks may be reluctant to lower lending rates, as competition for deposits keeps their borrowing rates elevated. It will be interesting to observe how banks react and how the RBI navigates this challenge to ensure borrowers benefit from the policy rate reduction.

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India Maintains Healthy Growth as Inflation Moderates The Indian economy remains well-positioned, experiencing healthy growth and moderating inflation. GDP growth was recorded at 6.7% in Q1 FY25. The GDP data for this quarter felt the impact of lower government spending due to General Elections. However, the important aspect to note is that private consumption rebounded to 7.4% in Q1 FY25 from a weak 4% growth recorded in the previous quarter. Overall Gross Fixed Capital Formation exhibited robust growth of 7.5%, surpassing the previous quarter’s performance. This is despite a contraction in the Centre’s capital expenditure in Q1. This suggests increased capex by households and private sector. Notably, household investment in real estate has remained particularly strong post-pandemic. In terms of sector-wise performance, the agriculture sector growth improved to 2% after previous two quarters of sub 1% growth. However, agri sector growth remained below the long-term average of approximately 3.7%. The sector was impacted by lower reservoir levels due to last year’s poor monsoon and heatwaves. Manufacturing growth slowed as anticipated, reflecting the moderation in corporate profitability in Q1. Construction sector showed further improvement, while the services sector maintained strong growth.

For the full year FY25, we anticipate GDP growth of around 7%. An increase in the government’s capital expenditure in the upcoming quarters and further pick-up in private capex will be supportive of growth. Moreover, it will be critical for pick up in consumption growth as seen in the Q1 data to sustain.

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Following a sluggish onset in June, the southwest monsoon gained significant momentum, achieving surplus levels in July (2% above normal) and further strengthening this surplus throughout August (6.6% above normal).

Although the monsoon in this season has been above normal at the national level, significant regional variations persist. Approximately 42% of the 36 meteorological sub-divisions experienced cumulative rainfall deficits, including key agrarian regions, which is a cause for concern. While central and southern India saw substantial surplus rainfall, it was notably muted in Eastern India and the major agrarian states of Northern India. Key states such as Punjab, Bihar, Haryana, Uttar Pradesh, Gangetic West Bengal, and Orissa experienced double-digit deficits in rainfall. This shortfall could negatively impact overall agricultural productivity and output, especially given that approximately 97% of kharif sowing has already been completed, leaving limited scope for recovery.

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Sharp rise in Financial Post Pandemic Evolution of Household Finances Liabilities Impacted Net Household Savings

The gross savings of household have remained relatively stable at approximately 24% of GDP in FY23, consistent with pre-pandemic levels. The gross savings was supported by a rise in physical asset savings. Gross financial savings remained largely stable, falling marginally to 11% of GDP in FY23 down from pre-pandemic average of 11.6% of GDP. However, a substantial increase in financial liabilities have impacted the net household savings in FY23. Household financial liabilities have touched 5.8% of GDP in FY23, the highest level in the past 16 years.

With a steep rise in leverage, the net household savings have significantly declined post-pandemic, dropping from an average of 21.1% of GDP in the pre-pandemic decade to 18.4% of GDP in FY23. Gross financial savings peaked at 15.4% of GDP in FY21, a period during which mobility restrictions and financial market returns bolstered gross financial savings. However, net household financial savings have been on a downward trend mainly due to a rise in financial liabilities.This significant rise in financial liabilities is primarily driven by the growth in personal loans.

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International Medical Tourism to India to drop 10-15%

In recent years medical tourism in India is on a gradual uptrend, given the relatively low cost of surgery, good quality critical care, hospitals with advanced technology, and expanding e-medical Visa facility. Although the year 2021 registered some growth in medical tourism post significant impact of Covid-19 pandemic in the previous year, however, it was still low given the travel restrictions which still prevailed during parts of that year. Year 2022 marked a significant comeback by the medical tourist as it reached almost at the pre-covid levels; and the trend continued during 2023, exhibiting 33% y-o-y growth. India's initiative to extend e-medical visa facility to nationals from 167 countries is expected to enhance medical tourism in the coming years.

India ranks among the top 10 countries for medical tourism globally and is especially preferred amongst South-Asian, African and Middle-East countries. The medical tourism industry is expected to grow further driven by the Government of India initiatives such as ‘Heal in India’. This particularly benefits the hospitals in metro cities the most as they are prime beneficiary from international patient’s flow. Nearly 70%-80% of medical tourists arriving in India are from Bangladesh and Middle East countries.

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The Indian cement industry achieved a decadal high in organic capacity addition during FY24, with nearly 45 million tonnes of new capacity bringing India’s total installed capacity to 641 million tonnes as of March 31, 2024. This is against average of 25-30 millions of average annual capacity addition over the last decade. Looking ahead, an additional 90-100 million tonnes are expected over the next two years, with approximately 65% of this increase driven by the top four players. Over the longer term, CareEdge Ratings anticipates a total of 234 million tonnes of capacity to be added across India, again with the top four companies leading the way.

Simultaneously, the industry is also witnessing significant spike in mergers & acquisitions activity leading to significant consolidation. The industry has seen around 18 deals since April 2014 with almost 195 million tonnes of capacity changing hands, out of which close to 116 million tonnes deals have been executed between FY23 till July 2024. This signifies the increasing intensity of consolidation in recent years. Adani group also entered cement industry in FY23 with acquisition of Ambuja Cements Limited and ACC Limited, having combined cement capacity of 67.5 million tonnes, from Holcim Limited.

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The operational performance of the power sector has been fairly robust during FY2023-24, with a generation and offtake growth of around 7%. The growth has continued during the first 4 months of FY2024-25. In 2023-24, peak shortage was 1.4% and the energy shortage was 0.3% as compared to 4.0% and 0.5%, respectively, during the corresponding period last year.

During FY2023-24, thermal capacity addition totalled over 5 GW. The coal allocation to the thermal power sector remained satisfactory with dispatches to thermal sector (including imports) growing by 10%. This also resulted in coal stocks with thermal power plants being relatively healthy at over 50 million MT. There have been continual allocation of coal through Shakti schemes (five auctions with total volume committed of over 24 million MT) and also through higher production by captive coal mines.

As far as Renewable Energy (RE) capacity addition is concerned, India added almost 18 GW of capacity with the solar sector accounting for the lion’s share. The government’s reiteration of the target of 500 GW by 2030 also augurs well for the growth of the RE sector in the country. REIA’s mandate to auction 50 GW lays down a roadmap for achievement of the said target.

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