In a world that is more interconnected than ever before, all countries are getting impacted by what’s happening in other countries. The uncertainty caused by the evolving global scenario is weighing heavily on the outlook for economies across the globe. Amidst this, the Indian economy remains a bright spot and has positioned itself to grow at 7 per cent in 2022-23, making it the fastest growing major economy in the world for third time in a row.
India is also set to act as an important contributor of global economic recovery in the current year. The International Monetary Fund (IMF) expects emerging economies to account for four-fifth of global growth this year, with India alone expected to play the role of a global growth engine and contribute more than 15 per cent. The stable growth of the Indian economy is aided by sustained government capital expenditure, deleveraging of the corporate sector, lower gross non-performing assets in the banking sector, and moderation in commodity prices.
Further, a clutch of high frequency indicators have also been posting robust performance in recent months. GST collections have remained healthy in the current fiscal so far, registering an average run rate of `1.49 lakh crore (Apr-Jan) as compared to `1.20 lakh crore in the same period last year. PMI manufacturing has continued to stay in the expansionary zone for nineteen continuous months. Bank credit growth has been growing upwards of 15 per cent since August 2022. On the services front, air passenger traffic has gained momentum, while services PMI has also inched higher.
The corporate sector performance for 2000 odd non-financial listed companies (ex oil & gas), the third quarter shows a slowdown in topline growth, and a marginal improvement in the net margins due to tapering off of commodity prices from their recent highs.
To support the ongoing growth momentum, Union Budget 2023-24 stuck a commendable balance between growth and fiscal consolidation. Particularly noteworthy is the Government’s announcement of enhancing the capital expenditure outlay by `10 lakh crores, an increase of 33 per cent from last year’s print. This amounts to 3.3 per cent of India’s GDP and will immensely bolster economic growth and employment through a multiplier effect.
The capex boost has been complimented by a concerted push towards digitisation, which has boosted the productivity levels in the economy. India today has made its own success models in the space of digitization, which it is offering to the world. The Unified Payments Interface (UPI) is a perfect example of technology boosting financial inclusion in the country and among its peers. Recently, India’s UPI and Singapore’s PayNow got integrated, which would enable faster remittances between two countries at a competitive rate.
Strong macro-economic fundamentals, therefore, combined with reform-oriented approach of the Government are building India’s economic growth trajectory. However, despite the resilience shown by the Indian economy, there are certain risks hovering on the horizon. Inflation, which emerged as a big challenge post the geo-political conflict between Russia and Ukraine, has averaged 6.8 per cent between April-January FY23 as compared to 5.3 per cent in the same period last year. It has remained above the RBI’s upper tolerance band of 2-6 per cent for most parts of the year except in the two lone months of November-December 2022. The core inflation, too, has remained sticky at around 6 per cent, which is likely to be the key monitorable from RBI’s monetary policy trajectory point of view going forward. To fend off the inflationary pressures, RBI on its part has so far raised the key repo rate by a cumulative 250 basis points to take it to 6.5 per cent. The central bank has indicated that it will remain vigilant, monitor every incoming information and data, and act appropriately to maintain price stability in the interest of strengthening medium-term growth.
The domestic monetary tightening has been synchronized with the interest rates being increased by the key global central banks. Admittedly, while the pace of rate hikes has slowed recently, major central banks have reaffirmed their hawkish stance on inflation. There is a high likelihood that entrenched inflation may prolong the tightening cycle, and therefore, borrowing costs may stay ‘higher for longer’.
On the external front, exports demand has been affected by a slowdown in global economy including India’s major export destinations such as US, EU and China. The impact has been quite evident as seen by the contraction in merchandise exports in the recent months. Imports too turned negative in January, although continued to outpace exports growth, thus pressuring the trade deficit. Going forward, the World Trade Organisation (WTO) expects merchandise trade growth in 2023 to slow down to 1 per cent from 3.5 per cent in 2022. This prognosis from WTO is expected to exacerbate the external headwinds, thus necessitating the need for adequate support from domestic growth impulses for sustaining the aggregate demand.
As the economy steps into a new fiscal year, the road ahead does not look easy with risks mainly emanating from a weak global environment. In an increasingly globalized world, the prospects of India’s future growth come against the backdrop of a difficult global macroeconomic scenario, thus raising the headwinds for domestic growth.
The upshot, however, is that the fundamentals of the Indian economy remain resilient on the back of a strong reforms’ agenda being pursued since last decade or so. Specifically, support to economic growth will come from the expansion of public digital platforms and lagged impact from the path-breaking measures announced such as PM Gati Shakti, National Logistics Policy and the PLI scheme to boost manufacturing output in the last few years. The Government’s continued heavy lifting on the capex front will also help drive in the private sector greenfield capex, which via its multiplier effect will help support domestic growth.
On balance, we are in consonance with the assessment proffered in the latest Economic Survey, which has projected a baseline GDP growth of 6.5 per cent.
The article was first published in CII Communique, March 2023 issue.