According to the recently released Economic Survey, the Indian economy has been able to sustain severe external shocks such as Covid19 syndrome, Russia-Ukraine war and policy induced inflation that posed severe challenges to the global economy in the financial year 2022-23 as is reflected through its performance indices. India became the world’s fifth largest economy, measured in current dollars in the year 2022 and the Survey hopes that the nominal GDP of India will be around US$ 3.5 trillion by the end of March 2023.
In real terms, the economy is expected to grow at 7 per cent for the year ending March 2023 compared to 8.7 per cent growth in the previous financial year. Besides, the pace of increase in the consumer prices has largely slowed down. The annual rate of inflation is below 6 per cent i.e., within the target limits set by the central bank. The wholesale prices are rising at less than 5 per cent which also sounds good. Despite so many external shocks, Indian exports of goods and services have managed to scale a growth rate up to 16 per cent export in the first nine months of the financial year (April-December) compared to the same period in the previous year. Though India’s import bill also got inflated the due to higher oil prices leading to higher the merchandise trade deficit, but at the same time the foreign exchange reserve levels are reported to be comfortable and external debt continues to be low. Besides the agrarian Indian economy was benefitted by a good monsoon, and higher reservoir levels which were above the 10-year average.
Uncertainties persist in the global environment
The Indian economy is reported to be developing itself as a modern, independent nation trying to adopt policies that can foster sustainable recovery. Yet the challenges due to uncertain global economic environment remain to be reckoned with. For instance, there are chances that the Eurozone economies may narrowly avoid a recession due to reopening of the Chinese economy on account of its reversal of zero-covid policy and also due to a warmer winter season reducing the burden of higher fuel cost on their disposable incomes. Besides, there is a hope that as the headline inflation rate declines in the US, the fed may further slowdown the pace of rise in its policy rates.
While there are lesser chances of a downturn in advanced economies resulting into resumption of economic activity therein and so the Indian economy may have a chance to increase its exports to these economies but at the same time there are concerns as regards increase in its import bills if the commodity prices start rising in anticipation of higher forecasted demand than projected earlier.
Also, the wage negotiations are leading to upward revisions across the globe and even significant interest rate reductions in the US and the Eurozone may not materialize as quickly as could be normally expected. Hence the Survey explains that the year is far from being predictable and may hold surprises for the countries and households.
Besides, the Indian economy continues to face the challenge of the depreciating rupee in light of the following factors:
- possibility of further increases in policy rates by the US Fed,
- increased imports due to higher growth momentum back home and
- higher import bills due to some of the commodity prices remaining at elevated levels
The combined effect of these forces could lead to the widening of the current account deficit for the Indian economy. Besides there is possibility of the loss of export stimulus as the global growth rate as well as global trade may have shrunk the global market size in the second half of the current year.
Besides, the continued tussle between Russia and Ukraine severely affected any attempts to restore the already disrupted supply chains due to the pandemic and the resultant limited trade opportunities. The conflict further caused an increase in the prices of critical commodities such as crude oil, natural gas, fertilizers and wheat that the global economic recovery had already triggered due to the huge fiscal stimuli and ultra-accommodative monetary policies adopted globally to deal with contractionary impact of the pandemic.
The inflation levels even breached the respective upper band of the target rate of inflation fixed by several central banks across the World. This led to the reversal of the monetary easing cycle into monetary tightening regime as the affected nations tried to rein in inflation which rather dampened growth in such economies.
To add to the woes of the developing nations, monetary tightening redirected capital flows to US markets now considered as safe-haven, which contributed to rising sovereign bond yields, and depreciation of most currencies against the US dollar. This pushed up the incidence of debt servicing for the nations that had high levels of public and private debt.
In many advanced economies of the world, the inflationary pressures are receding yet they continue to be on the historic record levels or their respective targeted levels and so even as the major central banks have reduced the pace of interest rate hikes in their latest rounds of monetary policy reviews yet they have mentioned that terminal policy rates may work out to be significantly higher than the market expectations.
Indian economy emerges sound and resilient
Despite having encountered the pandemic shocks, the Indian economy is reported to have steered its way towards a full recovery in the financial year 2021-22 forging ahead of many nations and even managed to ascend to the pre-pandemic growth path in the current financial year 2022-23 even as it faced the challenges posed by inflation which was accentuated due to the European geopolitical issues.
The Survey gives credit to the timely measures taken by the government and RBI, along with the easing of global commodity prices, through the combined effect of which the retail inflation was successfully contained within the RBI upper tolerance target in November 2022.
Further, the agencies worldwide continue to project India as the fastest-growing major economy of the world which is projected to grow at 6.5-7.0 per cent in the current financial year. These optimistic growth forecasts are based on the resilience in the Indian economy due to the following factors:
- the near-universal vaccination coverage overseen by the government brought people back to the physical markets and to spend on contact-based services, such as restaurants, hotels, shopping malls, and cinemas, among others, giving a boost to private consumption.
- rebound of private consumption boosted production activity and improved the capacity utilization rate for manufacturers and service providers.
- return of the workers to the construction sites contributed to growth of the housing sector.
- increase in Capital Expenditure (Capex) of the central government to the tune of 63.4 per cent in the first eight months of FY23 boosted manufacturing activity in private sector as well.
- improved corporate balance sheets also supported increase in private Capex and credit financing.
- improvement in the financial health of the well capitalized public sector banks enabled them to increase the credit supply particularly to the Micro, Small, and Medium Enterprises (MSME) sector which was further supported by the extended Emergency Credit Linked Guarantee Scheme (ECLGS) of the Union government.
- Boost in economic activity helped generate employment as reflected by the declining urban unemployment rate and in the faster net registration in Employee Provident Fund.
- Improvement in food security supported by government schemes like PM-Kisan and PM Garib Kalyan Yojana brought improvement in the rural health indices .
Outlook 2023-24
India’s recovery from the pandemic is considered to be relatively quick the economic survey projects that the growth in the upcoming year will be supported by solid domestic demand and a pickup in capital investment. The multiple structural changes introduced in the Indian economy are likely to continue to support the growth trajectory in the coming periods. Besides there are positives to support rise in capex both in the public and private sector. According to a recent update in the World Economic Outlook, International Monetary Fund (IMF) projects that the growth rate in India may be at 6.1 per cent in 2023 but it is likely to increase upto 6.8 per cent in 2024, with resilient domestic demand despite external headwinds. It also asserts that the global growth rate is projected to rise by 0.2 percent points from its earlier projections (October 2022) to 2.9 percent in 2023, then rise to 3.1 percent in 2024.
The economic survey projects a baseline GDP growth of 6.5 per cent in real terms in FY24 which is largely largely in consonance with the estimates provided by the international multilateral agencies such as the World Bank, the IMF, and the ADB and by RBI, domestically. Though the actual outcome for real GDP growth is projected to possibly lie in the range of 6.0 per cent to 6.8 per cent, depending on the economic and political global environment shaping the growth of the global economy.
Reference: This article is published by the Author in the Newsletter “KnowFunda Digest” (5th Edition) on LinkedIn on February 1, 2023.