Release of pent-up domestic demand, reasonably strong capital expenditure support from the government, and a farm sector that has attained a higher level of output stability, helped.
By early 2022, it was clear that post-pandemic revival of the global economy was largely artificial, and with the Ukraine war breaking out in February, the situation was soon compounded. Indian economy looked much better in (unfair) comparison, even though it actually only chugged along. Release of pent-up domestic demand, reasonably strong capital expenditure support from the government, and a farm sector that has attained a higher level of output stability, helped.
Though India retained the tag of “the fastest growing major economy” in 2022 after having recaptured it from China in the last financial year, its growth capacity had actually slipped much earlier. Perhaps even before the pandemic.
The country’s headline growth figures hide a significant push which is merely statistical – the gross value added (GVA) in Q2FY23 was just 7.6% higher than the corresponding quarter three years ago – average annual growth of a mere 2.53%.
As the year progressed, the global supply chain disruptions took a toll on India’s already-fragile growth momentum, and constricted global demand started hitting exports. Given the high unemployment rate (which has risen again of late), and flat growth in real rural wages, the consumption sector hasn’t had many impetuses, other than the spending power of the rich.
If strong earnings of a few large corporate groups – beneficiaries of formalisation of the economy and spike in commodity prices – was a strong driver of GVA in the past year, the ratio of corporate earnings to GDP fell sharply in June and September quarters, reversing the steep increases in the previous one-and-a-half years.
As 2023 dawns, the prospects are grimmer. A Covid wave in China has added to the glum caused by an impending recession in the West, which by some predictions, would be long-drawn in Europe. While IMF, World Bank and global rating agencies have been revising their short-term growth forecasts for the world and major national economies downwards through the past year, the WTO has predicted trade growth in volume term to plunge to a dismal 1% in 2023, down sharply from 3.5% in 2022.
While supply chain issues caused by geopolitical turmoil have eased and prices of commodities like oil, food and fertilisers have softened over the past few months, China’s Covid problems have lately added a fresh twist to global cargo movements, which have seen unprecedented re-directions in recent years. This could have an adverse bearing on India’s growth-inducing imports.
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Joint monetary tightening by the US Fed and other central banks is still to culminate. The Fed rate may get to 5% and may remain there for most part of 2023, even with no escalation of the geopolitical conflict. The Reserve Bank of India (RBI), determined to correct a slippage in its core mandate of keeping inflation within a medium-term target band of 4+/-2%, may not start lowering rates before the second half of 2023. Though India’s retail inflation hit an 11-month low of 5.88% in November, having dropped below the upper limit of the target band after a gap of 10 months, given the base play, it could inch up in December, before falling again by March.
While a baseline global scenario along these lines will let India remain the fastest-growing economy in 2023, any escalation of the Russia-Ukraine war could be upsetting. If energy and commodity prices spiral again as a fallout of any deepening of geopolitical conflicts, the inflation in the West could prove to be stubborn, necessitating longer and harsher monetary tightening.
As for India’s growth drivers for 2023, government managers and the RBI are pinning their hopes on early signs of fresh investments by a section of corporate India. Data doesn’t unambiguously support this optimistic view – capacity utilisation for the manufacturing sector recorded a seasonal decline to 72.4% in Q1FY23, after touching a recent high of 75.3% in the previous quarter.
In a strong-dollar environment, which is likely to persist in the near future, India will have its public debt concerns heightened. A wider current account deficit and strains concerning its financing could prove to be headaches, if these are prolonged enough to drain the reserves significantly.
The finance minister has said in Parliament recently that the government is committed to the medium-term fiscal consolidation path. This leaves her with the choice of low-double-digit growth in Budget capital expenditure in FY24, if the fiscal deficit is to be lowered to 6% or less in FY24, from an estimated 6.4% in FY23. States have already slowed their capex pace in the current year, and may not push it much in 2023 either. Such levels of public capex growth, while still being above the pre-Covid period trend, won’t suffice to produce very robust economic growth, given that large sections of corporate India may not shed their reluctance to make fresh investments in the short term.
Tax revenue growth has far exceeded Budget estimates this year, partly because the targets themselves were very conservative. The government deserves credit for improved tax compliance, but the resultant revenue gains will now get stablised, rather than grow further at the same pace.
A sanguine feature is India has shown remarkable resilience in the wake of the flux in global merchandise/services trade in recent years. This coincides with the calls for re-shoring and friend-shoring. India’s goods export markets have dramatically changed in recent years – for instance, The Netherlands is its third-largest export destination, ahead of China and Bangladesh; Brazil has become 8th biggest export market in FY23, up from the 21st spot in FY22. Such agility in merchandise trade re-orientation and the continued buoyancy of services exports would probably help, with “net exports” thus becoming less of a drag on GVA if not an addition.
The much-improved balance sheets of banks is another positive, with it already leading to a steady growth in bank credit.
However, major state assembly elections in 2023 and general elections in 2024 constrain the government’s ability to undertake structural reforms, which are necessary to raise the economy’s productive capacity. Substantive further liberlisation of factor market elements like land, labour and capital are likely to be delayed. But there are ongoing, less controversial initiatives like the national master plan for multi-modal connectivity – PM Gati Shakti – and the the digital drive, which could bolster the economy’s competitiveness.
There is a strong global context to the whole growth story of India. Ever since the global financial crisis of 2008, the world economy hasn’t really come out of the woods. Orchestrated global action has warded off a full-blown, catastrophic crisis, but also exposed asymmetries in the process –the uneven balance of global financial power and conflicts within the economic policy apparatus.
Emerging market economies like China and India now have a much larger share in the world output and value addition, than a few years ago. Despite China’s considerable slowing, EMEs are are all set to increase their stake further in the coming years, thanks primarily to India. Though EMEs have emerged as a daunting counterweight to the “mature economies”of the West, the latter still dominate the global financial system and play according to their own rules. Once the votaries of unbridled globalisation, they have slipped into a protectionist groove.
At the same time, the delinquent legacies of the West manifest as undeserved onus on EMEs like India in assorted spheres – supply chains, climate, food and energy security, defence spending, exchange rate and capital flows – across national borders. If 2023 is going to be worse for the world economy than 2022, a lot of blame would lie with the advanced economies.
The West’s crisis is an inevitable offshoot of coordinated monetary tightening by their central banks, which are all out to correct the “loose” policies, which gave steroidal energies to their comatose economies earlier. Though fundamental in nature, this crisis is potentially an abiding limiting factor for EMEs, since the problems of demand crunch are unlikely to wither away anytime soon. This is especially true of India, since, unlike China, it is in still early days of its long march to economic prosperity – being an upper middle income country first and then a high-income one.
https://www.financialexpress.com/economy/the-first-of-a-series-on-what-2023-could-have-in-store-economy-fingers-crossed/2926101/
