Economy Stays On Fast Track, Likely to Grow at 7.3% in FY24

Impact Analysis: India’s FY24 GDP Growth Projection

Source and Citation: Originally reported in Economic Times by ET Bureau on January 6th, 2024.

Analysis for Layman

India’s statistics office projects a robust 7.3% GDP growth for FY2024, surpassing the RBI’s forecast of 7%. The optimistic estimate reflects steady momentum despite global uncertainties and positions India as the fastest-growing major economy. Key drivers include a 10.3% rise in investments, primarily from public spending. While positive, cautious monitoring of consumption and global factors is warranted.

Impact on Retail Investors

The upgraded GDP forecast suggests improving macro fundamentals and positive corporate earnings, fostering optimism among retail investors. This counters earlier equity concerns, making Indian stocks relatively attractive amid global economic challenges. Prudent investors should monitor leading indicators and global stability. Sector-wise, infrastructure, banking, and capital goods may benefit, but consumption-driven sectors require careful consideration.

Impact on Industries

Infrastructure & Construction

Double-digit growth in public investments propels infrastructure and construction sectors, benefiting companies involved in projects like roads and ports. This stimulates demand for raw materials, positively impacting upstream steel and cement companies.

Banking

Higher credit deployment, particularly in planned capex projects, supports banking. Public sector banks linked to government spending gain, contributing to a potential improvement in stressed assets.

Engineering & Capital Goods

Companies in heavy machinery and capital goods manufacturing benefit from continued public investments. However, export demand faces challenges amid global uncertainties.

FMCG & Retail

Muted estimates for private consumption pose challenges for domestic brands, especially in FMCG and automobile sectors. Rural demand revival becomes crucial for sustained growth.

Long Term Benefits & Positives

1. Domestic Orientation
   • Resilient growth signifies a shift towards domestic demand-driven expansion, enhancing stability amid global turmoil.
2. Foundation Building
   • Sustained infrastructure rollout lays the groundwork for future entrepreneurial activity, contributing to rapid mobilization.
3. Buffer Room
   • If the higher GDP growth materializes, it provides the RBI flexibility for calibrated monetary tightening, supporting inflation control.
4. Fiscal Credibility
   • Tax buoyancy from formalization allows the government to adhere to fiscal consolidation, providing borrowing headroom for planned capex.

Short Term Positives & Negatives

Positives:

1. Sentiment Upside
   • Higher GDP growth sparks positive market sentiments, encouraging investors to re-enter equities and benefit from domestic resilience.
2. Valuation Comfort
   • Strong macro statistics improve market multiples’ relativity, positioning India as a hedge against global uncertainties.
3. Portfolio Transition
   • Balanced mutual fund portfolios may experience uplift with an upturn in the earnings cycle for banks, autos, and capital goods.

Negatives:

1. Commodity Risks
   • Export competitiveness hinges on global commodity cycles, and India’s vulnerability to global linkages limits insulation.
2. Stagflation Fears
   • Global recession risks could challenge India’s ability to sustain high growth, with potential impacts on capital markets.

In summary, while economic momentum indicates domestic resilience, monitoring global macros is essential for sustained optimism. Selective stock picking, considering sectoral dynamics, is crucial amid potential external shocks or policy surprises.

Companies Impacted by India’s Projected 7.3% GDP Growth

Indian Companies Likely to Gain:

• Capital Goods and Infrastructure Players: Increased government spending on infrastructure projects could benefit companies like Larsen & Toubro, KEC International, Tata Power, and Adani Green Energy. Infrastructure development also drives demand for construction materials, potentially benefiting companies like JSW Steel, ACC Ltd., and Ambuja Cements.
• Banks and Financial Institutions: Strong GDP growth and higher investment activity could lead to increased loan demand from businesses, benefitting banks like HDFC Bank, ICICI Bank, and Axis Bank. Higher disposable income may also boost loan demand from individuals, driving growth for retail banks and NBFCs.
• Fast-Moving Consumer Goods (FMCG) Companies: Rising consumer confidence and disposable income associated with economic growth could boost demand for FMCG products. Companies like Hindustan Unilever, Nestle India, ITC, and Marico could see increased sales volumes and market share gains.
• Automobile Manufacturers: Higher economic activity and consumer spending could translate into increased demand for vehicles. Passenger car manufacturers like Maruti Suzuki, Tata Motors, and Mahindra & Mahindra could benefit. Commercial vehicle makers like Tata Motors and Ashok Leyland might see increased demand from infrastructure projects and logistics growth.
• IT and Technology Companies: Continued digitalization efforts and the growing adoption of technology across sectors could benefit IT companies like TCS, Infosys, Wipro, and HCL Tech. Additionally, increasing demand for automation solutions and cloud computing could benefit specific segments within the IT sector.

Indian Companies Potentially Impacted:

• Agriculture-Dependent Companies: While the overall GDP growth is positive, the projected deceleration in agricultural growth (1.8% vs. 4% in FY23) could impact companies heavily reliant on the agricultural sector. Companies like Mahindra & Mahindra (agri segment), Coromandel International, and Zydus Cadila (agri-inputs) might see slower growth or headwinds.
• Retail Companies Focused on Lower-Income Consumers: If consumption growth doesn’t pick up as much as predicted, companies primarily targeting lower-income consumers might face slower growth compared to companies catering to higher income brackets. Some potential companies to consider include Avenue Supermarts, DMart, and Reliance Retail.

Global Companies Likely to Gain:

• Multinational Companies with Operations in India: Strong economic growth in India could benefit the Indian subsidiaries of companies like PepsiCo, Unilever, Nestlé, and Ford Motors. Increased consumer spending and business activity could lead to higher revenue and profitability for their Indian operations.
• Commodity Suppliers: Increased infrastructure spending and manufacturing activity could drive demand for commodities like steel, cement, and coal. This could benefit global commodity giants like Rio Tinto, BHP Billiton, and Glencore.

Global Companies Unlikely to be Significantly Impacted:

• Companies Primarily Focused on Developed Markets: Companies with limited exposure to the Indian market might see minimal impact from this news.

Overall Market Sentiment:

The projected 7.3% GDP growth paints a positive picture for the Indian economy and various sectors. Investors might become more bullish on companies benefiting from increased government spending, higher consumer spending, and infrastructure development. However, potential concerns regarding farm sector slowdown and consumption growth need to be monitored.

Disclaimer: This analysis is based on the provided information and is subject to change based on further developments. Market sentiment can be volatile and influenced by various factors beyond the scope of this analysis.