While a favourable base effect should help accelerate India's real GDP growth to around 7.5-8% YoY in the June 2023 quarter, we expect the growth trend to soften over the remaining quarters towards 5-6% YoY. For the full year, we maintain our base case that India's real GDP growth will decelerate to 6.2% YoY (from 7.2% YoY last year).
This compares to the consensus expectation of 6.1% YoY and the RBI's forecast of 6.5% YoY. We anticipate sequential normalisation in household consumption growth to continue as purchasing power is impacted by tight monetary policy and the depletion of accumulated pandemic savings. Capex growth has largely held up on higher government capex and demand for residential real estate holding up.
However, the pick-up in private corporate capex remains gradual. Our strategy team analysis indicates that bulk of capex spenders historically are hinting at lower capex in the near term/FY24. Finally, Goods trade deficit beginning to widen, services trade surplus moderating.
On Asia’s supply chain, we think India has an absolute advantage in terms of population size and demographic structure. India's demographics cut both ways in a positive sense – providing both a large, low-cost labour force, and a sizeable domestic market to absorb manufacturing output.
However, India is starting from a low base with its share of manufacturing in GDP remaining largely stagnant at roughly 15% over the past decade (versus a 28% share for China).
Going forward, we believe India has the potential to emerge as a beneficiary of the China+1 strategy in the medium to long term. The manufacturing wages in India are still amongst the lowest in Asia.
In addition, Indian policymakers have made significant strides in developing the country's business environment in recent years, lowering the corporate tax rate and other policy initiatives (in the form of both incentives and reforms) to boost manufacturing.
On the downside, India is significantly disadvantaged by higher logistics costs, low labour productivity and regulatory impediments.
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