New Delhi: Referring to the state of the Indian economy in 2022-23 as “recovery complete”, the Economic Survey released Tuesday has projected a baseline GDP (Gross Domestic Product) growth of 6.5 per cent in the financial year 2023-24.
However, the Survey does say that global factors could continue to influence Indian growth, which could mean that growth would “probably lie in the range of 6.0 per cent to 6.8 per cent”.
Released prior to the Union Budget every year, the Economic Survey was tabled in Parliament by Finance Minister Nirmala Sitharaman. It captures the data and trends of the economy in the year gone by.
Chief Economic Advisor V. Anantha Nageswaran, in the Survey, has said that although India has recovered from the pandemic, it’s not quite out of the woods yet.
“The Indian economy, however, appears to have moved on after its encounter with the pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to ascend to the pre-pandemic growth path in FY23,” the Survey said.
“Yet in the current year, India has also faced the challenge of reining in inflation that the European strife accentuated,” it pointed out.
The Survey noted that the steps taken by the government and the Reserve Bank of India (RBI), coupled with an easing in global commodity prices, has meant that inflation in India has come under some control in the last few months. According to the government’s Consumer Price Index, inflation in India fell to 5.88 per cent in November 2022 — the first time it was below 6 per cent in the calendar year 2022 — and further to 5.72 per cent in December.
“However, the challenge of the depreciating rupee, although better performing than most other currencies, persists with the likelihood of further increases in policy rates by the US Fed,” the Survey said. “The widening of the CAD (Current Account Deficit) may also continue as global commodity prices remain elevated and the growth momentum of the Indian economy remains strong.”
Another factor that could negatively impact the Indian economy, the Survey said, was a further fall in exports due to the slowing of the global economy. In a separate release, the IMF (International Monetary Fund) Tuesday said that global growth was expected to slow down to 2.9 per cent in 2023 from 3.4 per cent in 2022.
On the flip side, the Survey also mentions several ongoing factors such as the limited economic and health impact of China opening up, the imminent cessation of monetary tightening in advanced economies and the desire of companies to diversify their supply chains as positives for the Indian economy not just in the short term, but also in the medium term till 2030.
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What is driving growth?
The Survey attributes the resilience and strength of the Indian economy to the improved performance of private consumption and capital formation.
“These optimistic growth forecasts stem in part from the resilience of the Indian economy seen in the rebound of private consumption seamlessly replacing the export stimuli as the leading driver of growth,” the Survey said. The uptick in private consumption has also given a boost to production activity resulting in an increase in capacity utilisation across sectors.”
The rebound in private consumption itself was driven by India’s “near-universal” vaccination coverage, “that brought people back to the streets to spend on contact-based services, such as restaurants, hotels, shopping malls, and cinemas, among others”.
The impact of the vaccination drive has been more broad-based as well, the Survey notes, saying that vaccinations meant that migrant workers could return to work at construction sites as the impact of increased consumer spending began to lift the housing market.
“This is evident in the housing market witnessing a significant decline in inventory overhang to 33 months in Q3 of FY23 from 42 months last year,” the Survey said.
On the other hand, the capital expenditure (capex) by the central government, which increased by 63.4 per cent in the first eight months of FY23, not only increased economic activity, but also provided an impetus to the private sector to re-start its own investments.
“On current trend, it appears that the full year’s capital expenditure budget will be met,” the Survey said. “A sustained increase in private capex is also imminent with the strengthening of the balance sheets of the corporates and the consequent increase in credit financing it has been able to generate.”
At the same time, the improved financial health of the public sector banks has meant that they can provide credit to industry as and when required. This confirms the findings of various news reports last year, which showed that bank credit to industry was at an eight-year high.
“Consequently, the credit growth to the Micro, Small and Medium Enterprises (MSME) sector has been remarkably high, over 30.6 per cent, on average during Jan-Nov 2022, supported by the extended Emergency Credit Linked Guarantee Scheme (ECLGS) of the Union government,” the Survey said.
The Survey added that, if inflation declines in FY24 and if the real cost of credit does not rise, then credit growth is likely to be “brisk” in FY24.
In the near-term, while there are several factors that could adversely impact India’s growth, the Survey also highlights various ongoing and imminent factors that could buoy the Indian economy. These include the limited health and economic impact from the ongoing COVID-19 surges in some economies, the fact that inflationary pressures from the opening up of the Chinese economy were more benign than expected and the fact that “recessionary tendencies” in major advanced economies could trigger a cessation in monetary tightening and a return of capital flows to India.
Easing inflation, but wait & watch
Although the Survey has been quite positive on India’s inflation management, crediting the Government and the RBI with managing to bring it down, it does say that several global factors persist that could result in upside risks (leading to higher inflation), thereby outweighing downside ones.
“For instance, the re-emergence of Covid-19 in China can trigger supply chain disruptions as was the case during the pandemic period,” the Survey warned. “On the other hand, if China returns to normalcy from Covid-19, there can be a surge in commodity demand — thus reversing the recent slump in commodity prices.”
“Further, the probability of a soft landing in the US economy has risen in recent months, and that might keep up the US demand for oil,” it added. “Similarly, the geopolitics associated with oil can particularly affect our imported inflation.”
According to the Survey, the RBI forecasts elevated domestic prices for cereals and spices in the near term owing to supply shortages. It added that milk prices are also expected to spike due to higher costs of feed for milk-producing animals.
“In general, climate across the world has become increasingly erratic, further fortifying upside risks to food prices,” it said. “A lot depends on industrial input prices: they may ease, but on the flip side their delayed pass-through to consumer prices may contribute to the stickiness of core inflation.”
Medium term outlook
Looking ahead, the Economic Survey is highly optimistic about economic growth surpassing the pre-pandemic levels in the 2023-2030 period comfortably and resembling the post-2003 years of strong growth.
“As the health and economic shocks of the pandemic and the spike in commodity prices in 2022 wear off, the Indian economy is thus well placed to grow at its potential in the coming decade, similar to the growth experience of the economy after 2003,” the Survey said. “This is the primary reason for expecting India’s growth outlook to be better than it was in the pre-pandemic years.”
The Survey has detailed a number of factors that will drive this stronger growth in the rest of this decade. These include the improved health of the financial system leading to more effective credit provisioning and delivery, and the advantages offered by the digital push of the last few years.
“The sound and healthy financial system developed over the last few years will ensure efficient credit provisioning, contributing to higher growth in the coming years through higher investments and consumption,” the Survey said. “Thanks to India’s digital revolution and formalisation, banks have far more information about their customer’s credit risks than before, thus being able to make credit and pricing decisions better than before. That should make for a healthier and longer credit cycle than before.”
Notably, the Survey also highlighted the opportunity that India can take advantage of from the growing desire by companies for diversified supply chains.
“The last few years have exposed multinational firms to unprecedented risks due to global trade tensions, pandemic-induced supply chain disruptions, and the conflict in Europe,” it noted. “Firms were exposed to the risk of concentrating their production in a single country…With enabling policy frameworks, India presents itself as a credible destination for capital diversifying out of other countries.”
(Edited by Geethalakshmi Ramanathan)
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