Govt. Spending, Low-Income Jobs, Supply Renewal To Accelerate India’s GDP Growth In 2023: Credit Suisse

In light of the Indian market's underlying economic resilience, Credit Suisse has raised the country's rating from "Underweight" to "Benchmark" for 2023
Govt. Spending, Low-Income Jobs, Supply Renewal To Accelerate India’s GDP Growth In 2023: Credit Suisse

India's gross domestic product (GDP) growth will accelerate in 2023, bolstered by renewed government spending, increased low-income jobs, and the restoration of supply chains, Swiss bank Credit Suisse said in a report.

The report said that the country's economic activity is close to the pre-pandemic levels, higher than officially recorded, and the GDP growth rate is expected to be higher than the current consensus of 6 per cent in the fiscal year 2024. It noted that multiple indicators, including energy intake, point towards a higher growth rate.

Neelkanth Mishra, co-head of equity strategy, Asia-Pacific region, and India research head at Credit Suisse, said, "Government spending, increase in low-income jobs and easing of supply-chain bottlenecks should partly offset the impact of rate hikes, a global slowdown, and the need to reduce the balance-of-payments (BoP) deficit.

He added, "The risk factors continue to be dependence on imported energy, reliance on foreign capital, and a slowing global economy."

In light of the Indian market's underlying economic resilience, Credit Suisse's Global Equities Strategy team raised the country's rating from "Underweight" to "Benchmark" for 2023, despite high valuations and a declining currency.

However, it refrained from giving an "Overweight" ranking, primarily due to the high valuation and worsening BoP situation that may require a policy-induced slowdown.

Three-year compounded annual growth rate (CAGR) of several volume indicators is much higher than the 2 per cent annualised GDP growth seen in the September quarter of 2022. Credit Suisse said the final result for FY24 would be better than the current projections, although growth could slow due to the effect of rate hikes.

DII Inflows Overshadow FPIs

The influx of funds from domestic institutional investors (DIIs) has overshadowed the inflows from foreign portfolio investors (FPIs).

Credit Suisse expects major contributors to DII, such as insurance (US$12 billion/year), Employees' Provident Fund (US$7-8 Billion/year), and Systematic

Investment Plans (SIPs) (US$18-20 Billion/year) to sustain, even as non-SIP retail flows will continue moderating due to higher rates and improvement in real estate.

Credit Suisse Overweight In Banking

Forward earnings per share (EPS), the global market's price to earnings (P/E), and India's P/E premium to global equities are factors that can determine market returns. Over the previous year, earnings and premiums have dominated returns, offsetting a dwindling P/E. Credit Suisse said a larger premium is possible but unlikely.

The ceiling for returns over 2023 might be the potential gain of around 15 per cent in forward earnings, and a lower P/E poses a downside risk.

Credit Suisse continues to favour domestic over international cyclical and is "overweight" in the banking, cement, staples, and construction sectors, while industrial, information technology, and metals sectors are "underweight".

Key Risks

Soaring Energy Prices: India imports almost half of its energy requirements. Rising prices due to supply shortages could reduce risk-taking and intensify BoP pressures.

Slow Global Growth: Indian export dependence is among the lowest, yet the market is closely tied to global expansion. In addition, a significant portion of exporters' income is based on global commodity prices.

While the energy import cost has decreased due to a global slowdown, India's BoP deficit is at risk due to sluggish exports and weaker capital inflows.

In addition, higher dollar funding rates may also halt dollar inflows to India, triggering a significant slowdown.

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