Factors like government expenditure slowdown before elections and an unfavourable base effect influence the outlook. However, with the government’s focus on capital expenditure and infrastructure development, there are a lot of opportunities.

Additionally, the revival of rural demand, driven by a favourable monsoon forecast, could play a crucial role in shaping the economic outlook for the next fiscal year.

In this article, you will understand these trends, and potential market corrections, while identifying top investment sectors poised for growth in FY25.

Indian Real GDP Growth Trends

Although the real GDP growth for the past three-quarters of FY24 prints 8.2%, 8.1%, and 8.4%, respectively, the expectation for the fourth quarter of FY24 is a little soft. This can be due to two factors:

1. Government expenditure is one of the driving forces of GDP. However, government spending undergoes a general slowdown before general elections. 

2. The base is unfavourable.

The data of the last few years shows that the Q4 GDP generally delivers 6.8% QoQ growth. However, in Q4 FY23 the QoQ GDP growth was 8.6%.

So, if this is to normalise, then the GDP growth for Q4 FY24 is likely to disappoint. Hence, the FY24 GDP growth is likely to be a little below 8%.

However, regarding FY25, the government’s interim budget gives us some hints. Capital expenditure and capacity building on infrastructure and the manufacturing sector continue to be on the cards.

Various institutions are forecasting a 6.5-7.0% GDP growth rate.

Reviving Rural Demand

We need to look at the situation from a different lens. A good monsoon will help revive rural demand. However, for its sustenance policy intervention plays a very crucial role.

The Central Water Commission recently stated water scarcity with negative 19% availability in the reservoirs pan India compared to the last year.

Moreover, the same is negative 4% compared to the ten-year average. The situation is gloomy if we further peek into the regional-level data.

A favourable monsoon is one of the critical factors leading to the revival of rural demand revival this year. According to the IMD, the monsoon level would be 106% of the long-period average (LPA) this year.

Government policies should focus mainly on providing sustainable employment opportunities. This will help increase the villages' and smaller towns' per capita GDP.

Navigating Market Corrections with a Long-Term View

It is difficult to guess how markets perform if election results defy expectations. It is one of the most inefficient ways of gauging the market performance.

We believe that making investment decisions based on a one-time short-term event leads to undesirable results in the long term. Hence, having a fundamental view of businesses and their cash flow generation over multiple years gives more conviction.

However, a correction in the market is overdue. Market correcting at regular intervals is a sign of a healthy market. We have recently pumped up our cash holdings.

Therefore, any dip in the market will serve as a buying opportunity.

Top Investment Sectors Poised for Growth in FY25

In FY25, banks are likely to turn favourable, depending upon the timing and quantum of the rate cuts. This especially holds for the underperforming private sector banks. Hence, private sector banks can deliver alpha over the next year.

The channel inventory in the chemical sectors has normalised in the last few quarters resulting in excess capacity. Hence, buoyancy in the demand will help in both volume growth and margin expansion due to better fixed-cost absorption.

If IMD’s monsoon forecast proves correct, the rural demand will see good days. In that case, various companies are available at a reasonable valuation under this theme.

Challenges and Opportunities Amidst Revenue Prospects and Election Impact

In the last few quarters' observation, the companies under our investment universe saw margin expansion. This resulted in them delivering higher earnings growth.

The earnings growth completely depends on revenue growth as the raw material tailwind is over. Although the base for revenue growth in FY25 is favourable, the end-user demand is a critical variable in the equation.

However, the management commentary is soft across sectors. We need to wait for next quarter for a fair assessment of the situation.

Final Thoughts

It is critical to know India's key economic trends for making informed investment decisions. The Q4 FY24 may present challenges due to pre-election spending slowdowns.

But the long-term outlook remains positive with significant opportunities in sectors like private banking, chemicals, and rural demand-driven industries. Strategic investment, grounded in a thorough analysis of market fundamentals and macroeconomic indicators, can lead to substantial gains. 

By keeping a close eye on government policies, monsoon predictions, and market corrections, investors can position themselves to capitalise on the growth potential that the coming year holds.