India’s economic growth to beat expectations in 2023, believes Credit Suisse: Know what triggers will drive growth next year

Stating that India’s level of economic activity is closer to the pre-pandemic path, global brokerage firm Credit Suisse expects the Gross Domestic Product (GDP) growth of the country going ahead will be stronger than the current consensus forecast of 6 per cent in the financial year 2023-24 (FY24).

The brokerage reasons it out in its statement on economic growth as ‘many broad-based high-frequency indicators, including consumption of energy, point to growth being stronger than reported.’

Despite concerns over high valuations and a weakening currency, Credit Suisse’s Global Equities Strategy team has upgraded India from ‘Underweight’ to ‘Benchmark’ for 2023, considering the market’s underlying economic strength, the brokerage said in its statement on India’s outlook.

Although, the brokerage has confidence in the attractive structural prospects of India, the firm has held back from going 'Overweight’ on the market – this is due to the high valuation premium of the market and the weakening balance of payments situation for the economy.

“We are expecting a stronger acceleration in India’s GDP growth in 2023 owing to several domestic growth drivers,” Neelkanth Mishra, Co-Head of Equity Strategy, Asia-Pacific and India Head of Research at Credit Suisse said in the outlook 2023 report.

He added that the revival in government spending, increase in low-income jobs and easing of supply-chain bottlenecks should partly offset the impact of rate hikes, a slowing global economy, and the need to reduce the balance-of-payments (BoP) deficit.

“The risk factors continue to be dependence on imported energy, reliance on foreign capital, and a slowing global economy,” he further stated.

Credit Suisse believes measurement challenges are very likely keeping official measures of economic activity subdued, and subsequent revisions with better data would drive upgrades.

Even as growth slows due to the lagged effect of rate hikes and the slowing economy, the outcome for FY24 should be better than current consensus forecasts, the brokerage also added.

Similarly, it stated that Domestic Institutional Inflows (DII) now overshadow Foreign portfolio investment (FPI) inflows.

Of the major contributors to DII flows, Credit Suisse expects insurance (US$ 12bn/year), the Employees' Provident Fund Organization (EPFO) (US$ 7-8bn/year) and Systematic Investment Plans (SIPs) (US$ 18-20bn/year) to sustain, even as non-SIP retail flows continue moderating due to higher rates and improvement in real estate. This should keep valuation multiples supported.

A higher premium is possible, but unlikely, in Credit Suisse’s view. The potential 15 per cent gain in forward earnings may set the ceiling for returns over 2023, and a lower P/E poses a downside risk.

Credit Suisse continues to prefer domestic cyclicals over global ones and is ‘overweight’ on sectors such as financials, cement, staples and construction while being ‘underweight’ on Industrials, IT and metals.

Key risks to consider:

India imports nearly half of its dense energy needs, and an increase in these prices due to supply constraints hurts risk appetite and exacerbates balance of payments (BoP) pressures, according to Credit Suisse.

Weaker global growth has relieved some near-term pressure from the energy import bill but slowing exports and weaker capital inflows are now risks to India’s BoP deficit, the brokerage said, adding that if higher dollar funding rates drive any financial volatility globally, it could potentially stall dollar inflows to India as well, catalysing a sharp slowdown