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India’s allure

Economist & Chief Economist Southeast Asia and India, ANZ Research

2024-01-17 00:00

Structural changes to the global economy, the ongoing march of digitalisation and a shifting investment profile have all resulted in a rapid change to India’s growth potential in the post-COVID era.

These factors, combined with market forecasts of annual growth between 6.5 per cent and 7 per cent (compared to just 6 per cent pre-pandemic), have added to India’s allure in the eyes of foreign investors.

ANZ Research expects India to record 6.9 per cent annual growth in the year to March 2024. That forecast was lifted substantially after third-quarter gross domestic product (GDP) figures beat market expectations, on the back of robust domestic demand driven by public spending and a recovery in manufacturing.

That said, India’s external sector drag is sizeable, and ANZ Research expects it to persist in fiscal 2025. With normalisation in domestic demand, GDP growth is expected to fall to 6.2 per cent.

A stronger reform agenda, with deeper interventions into the economy’s complex and informal labour market, may be necessary for India to realise the true economic potential.


Details within India’s third-quarter GDP revealed pockets of weakness. Tepid private consumption growth is unlikely to pick up sharply, as the abrupt rise in its share of GDP due to pent-up demand is still normalising.

Other stresses include India’s K-shaped recovery hurting consumption among economically weaker sections. Household financial savings have tumbled alongside a notable rise in outstanding loans, indicating a moderate consumption trajectory ahead. Tighter lending norms for unsecured consumer loans will also be a drag.

Investment spending is a bright spot, with a rising share in GDP. However, public-sector capex has been the main driver so far. While there are signs of an early-stage private-sector capex cycle, further strengthening will be necessary to support sustained growth.

Election-related policy uncertainty (a general election in India is set for April and May) in first half of 2024 may be a temporary impediment. ANZ Research expects a fuller private-sector capex recovery in the second half of the year, on the back of reduced uncertainty and better financial conditions.

While export growth has bottomed out, ANZ Research does not expect a strong recovery. Growth weakness in key developed markets could soften external demand, while domestic strength could keep imports high in terms of both value and volume.

ANZ Research expects India’s services trade surplus to continue, on the back of a structural expansion in the suite of exported services. Remittances are also forecast to remain strong.

The current account deficit is forecast at 1.6 per cent of GDP in fiscal 2024 but may widen to 2 per cent the year after, as a stronger pick-up in private-sector capex could lead to higher imports. Any deficit will remain manageable against the backdrop of a healthy financial account balance, both in 2024 and 2025.

Although foreign direct investment inflows have weakened, foreign portfolio investment flows have picked up. Foreign buyers are building positions in India’s sovereign debt ahead of the index inclusion in June 2024. Equity inflows have also fared well, as reflected in India’s stock market outperformance. Overall, ANZ Research expects a modest balance of payments surplus in India for both 2024 and 2025.

On the inflation front, India’s outlook depends upon food prices. So far, repeated and unexpected food price shocks have prevented a desirable fall in headline consumer inflation. However, core inflation is easing quite rapidly and has already fallen below 4 per cent, the monetary policy target for headline inflation.

Within the food basket, inflation in items such as cereals, pulses, oilseeds, prepared meals and beverages has also begun to ease. ANZ Research expects fiscal 2024 and 2025 consumer price inflation (CPI) to average 5.5 per cent and 4.6 per cent, respectively. In other words, an alignment with the 4 per cent target inflation will remain elusive for longer. The Reserve Bank of India’s projections reflect the same.

ANZ Research expects CPI inflation to average close to 4 per cent on a sustained basis by the end of the second quarter of fiscal 2025. For a forward-looking central bank, assuming a typical lag of three to four quarters for monetary policy transmission, this means that policy easing will likely kick-off in the third quarter of fiscal 2024.

For now, ANZ Research expects only a shallow rate-cutting cycle, taking the rate 50 basis points lower by the end of 2024. The risk is if food price shock recedes quicker, a deeper and earlier rate-cutting cycle is possible.


Fiscal risks in India look manageable as the risk from lower-than-expected nominal GDP growth will likely be offset by buoyant direct taxes, which will help meet added expenditures. Direct tax collections are on an unexpectedly strong uptrend, growing 25 per cent over the year in net terms.

Overall, ANZ Research expects the Indian government to meet its fiscal deficit target of 5.9 per cent of GDP in fiscal 2024, with a risk of a slippage – but expect some spending tweaks from capex to current expenditures closer to the election. It might be tough to deliver enough fiscal consolidation to reach existing targets, especially if the ongoing capex boost to the economy continues. Resilient nominal GDP growth and enhanced tax compliance will be necessary to limit fiscal risks in fiscal 2025 and beyond.

Besides the policy repo rate, ANZ Research expects the RBI to continue intervening in financial markets using several tools. The likelihood of an open-market bond sale is already looming and will likely materialise if the RBI needs to absorb and sterilise foreign exchange (FX) inflows on account of bond index inclusion to keep banking system liquidity at a non-inflationary (neutral to deficit) level.

Building a strong buffer of FX reserves will be a priority once global financial conditions ease. The RBI can also announce sector-specific macroprudential measures, such as the recent risk weight hike for unsecured personal loans, to manage any potential stability risks for the financial sector.

Dhiraj Nim is an Economist & Sanjay Mathur is Chief Economist Southeast Asia and India at ANZ Research

This article is an excerpt from the ANZ Research report “ANZ Research Quarterly: range of economic outcomes narrows”, published December 19, 2023

India’s allure
Dhiraj Nim & Sanjay Mathur
Economist & Chief Economist Southeast Asia and India, ANZ Research
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