Capital as growth driver

After a robust 7.3% growth this fiscal, we project a moderation to 6.4% next fiscal, largely due to cyclical factors. This year, global growth is expected to slow and the impact of the Reserve Bank of India's (RBI) rate hikes on domestic demand will play out. We also need to monitor the impact of the escalation of the Middle East conflict on energy and logistics costs.

To be sure, the United States (US) Federal Reserve is expected to cut rates this year. That said, the strong labour market data and higher-than-expected inflation (which remains above the tolerance threshold) have once more cast doubt on the timing and extent of the rate cuts expected to begin this year.

In India, the inflation print of 5.7% in December 2023 was driven solely by volatile vegetable prices and stubborn foodgrain inflation. However, it will keep the RBI cautious on the rate front as it eyes the 4% target. The continued softening of core inflation and the deflation in fuel prices bring only two cheers. Given food has a substantial weight in the Consumer Price Index (CPI) basket, the persistence of high inflation in this category keeps the risk of its transmission to non-food components alive.

We project the Indian economy to grow at an average rate of 6.7% per annum until the end of this decade, i.e., between fiscals 2024 and 2031, a notch above the pre-pandemic decadal average of 6.6%. The key contributor to this trend will be capital, reveals our growth accounting exercise. This is a result of the investment-driven strategy of the government to deal with the scarring from the pandemic, when the private sector was investment shy. The government increased capital expenditure significantly to support the build-up of infrastructure and offered interest-free loans to states to bolster their own investment efforts.