India’s Economic Leap

India’s phenomenal growth rate of 7.2 percent in FY23 and 6.1 percent in the fourth quarter shows that its economic propensity continues to rise.

The Gross Value Added (GVA) growth significantly outpaced GDP growth, reaching 6.5 percent in Q4 and 7 percent for the entire fiscal year. This trend indicates positive growth across sectors with core GVA expanding at an impressive 7.6 percent in FY23.

According to the Economic Survey 2022- 23, India’s economic growth in FY23 has been principally led by private consumption and capital formation and they have helped generate employment as seen in the declining urban unemployment rate and the faster net registration in Employee Provident Fund.

Ground for India’s Economic Upside

Indian Economy’s view of development is in a swing because of multiple factors:

• According to the Economic Survey 2022- 23, India’s economic growth in FY23 has been principally led by private consumption and capital formation and they have helped generate employment as seen in the declining urban unemployment rate and the faster net registration in Employee Provident Fund.
• The Inflationary impulses from the reopening of China’s economy turned out to be neither significant nor persistent;
• The limited health and economic fallout for the rest of the world from the current surge in Covid-19 infections in China and, therefore, continued normalization of supply chains
• The increase in the overall bank credit has also been influenced by the shift in borrower’s funding choices from volatile bond markets, where yields have increased, and external commercial borrowings, where interest and hedging costs have increased, towards banks.
• The Capital Expenditure (Capex) of the central government, which increased by 63.4 percent in the first eight months of FY23, was another growth driver of the Indian economy in the current year, crowding in the private Capex since the January-March quarter of 2022. A sustained increase in Private Capex is also imminent, with corporates strengthening their balance sheets and consequentially an increase in generative credit.
• The Survey shows that vaccination has helped migrant workers return to cities to work on construction sites as increased consumption spills over into the housing market.
• It also says that the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has been directly providing jobs in rural areas and indirectly creating opportunities for rural households to diversify their sources of income generation. 
• Schemes like PM-Kisan and PM Garib Kalyan Yojana have helped in ensuring food security in the country, and their impact was also endorsed by the United Nations Development Programme (UNDP).
• The results of the National Family Health Survey (NFHS) also show improvement in rural welfare indicators from FY16 to FY20, covering aspects like gender, fertility rate, household amenities, and women empowerment.

The Survey emphasizes that growth is inclusive when it creates jobs. Both official and unofficial sources confirm that employment levels have risen in the current financial year, as the Periodic Labour Force Survey (PLFS) shows

The survey notes with optimism that the Indian economy appears to have moved on after facing the pandemic, positioning itself for a full recovery in FY22 and a pre-pandemic growth trajectory in FY23, ahead of many nations.

A View at the Various Sectors

• The Manufacturing Sector witnessed a muted growth of 1.3 percent during FY23. It also saw a significant jump of 4.5 percent in Q4.
• The Agriculture Sector experienced an upsurge of 4.0 percent.
• Mining & Quarrying and Construction saw growth rates of 4.6 percent and 10 percent, respectively, according to the SBI report.
• In the Services Sector, the ‘Financial, Real Estate & Professional Services’ segment grew by 7.1 percent.
• The ‘Trade, Hotels, Transport, Communication & Services related to Broadcasting’ segment saw a remarkable growth of 14 percent.
• FMCG companies reported significant growth during Q4FY23 with a 14 percent increase in topline and a substantial 28 percent growth in the bottom line during Q4FY23 compared to the previous year.
• While investment demand remained strong, other components experienced a slowdown in growth rates. Private consumption, the largest component, saw a sharp decline and government consumption showed no growth.
• Private investment activity appears robust and domestic fiscal and credit conditions support growth in FY24, according to SBI Research’s Ecowrap report.

The SBI report suggests that the narrowing credit-to-GDP gap reflects improved credit demand, particularly in the manufacturing sector, which is experiencing rising capacity utilization. From the perspective of equity markets, the strong growth in the manufacturing sector only reinforces the trend seen in the Q4 quarterly results where many mid-sized companies in sectors such as engineering, auto, building materials, etc. have shown strong volume offtake.

The Underlying Challenges Ahead

As quoted in the Economic Survey of India report 2022- 23, the credit growth to the micro, small, and medium enterprises (MSME) sector has been remarkably high, over 30.5 percent, on average during Jan-Nov 2022.

The Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman tabled the Economic Survey 2022-23 in Parliament, which projects a baseline GDP growth of 6.5 percent in real terms in FY24. The projection is broadly comparable to the estimates provided by multilateral agencies such as the World Bank, the IMF, and the ADB and by RBI, domestically.

It says, growth is expected to be brisk in FY24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in India with the strengthening of the balance sheets of the corporate and banking sectors. Further support for economic growth will come from the expansion of public digital platforms and path-breaking measures such as PM Gati Shakti, the National Logistics Policy, and the Production-Linked Incentive schemes to boost manufacturing output.

This positive development is certainly good news for the Indian economy, however, there are continuing challenges for FY 2024.

1. Global growth is forecasted to slow from 3.2 percent in 2022 to 2.7 percent in 2023 as per IMF’s World Economic Outlook, October 2022. A slower growth in economic output coupled with increased uncertainty will dampen trade growth. 
2. While commodity prices have retreated from record highs, they are still above pre-conflict levels. Strong domestic demand amidst high commodity prices will raise India’s total import bill and contribute to unfavorable developments in the current account balance.
3. Entrenched inflation may prolong the tightening cycle, and therefore, borrowing costs may stay ‘higher for longer’. In such a scenario, the global economy may be characterized by low growth in FY24. 
4. As the global economy is slowing down, leading to lower exports for India over the past three months. 
5. Lack of robust private capital expenditure also hampers maintaining growth momentum in FY24 similar to the fiscal year 2022- 23.

Outlook: 2023

The Survey notes that like the rest of the world, India, too, faced this extraordinary set of challenges but withstood them better than most economies.

In the last eleven months, the world economy has faced almost as many disruptions as caused by the pandemic in two years. The conflict caused the prices of critical commodities such as crude oil, natural gas, fertilizers, and wheat to soar. This strengthened the inflationary pressures that the global economic recovery had triggered, backed by massive fiscal stimuli and ultra-accommodative monetary policies undertaken to limit the output contraction in 2020. Rising commodity prices also led to higher inflation in the Emerging Market Economies (EMEs).

India is the third-largest economy in the world in PPP terms and the fifth-largest in market exchange rates. 

So far, India has reinforced the country’s belief in its economic resilience as it has withstood the challenge of mitigating external imbalances caused by the Russian-Ukraine conflict without losing growth momentum in the process. India’s stock markets had a positive return, unfazed by withdrawals by foreign portfolio investors. India’s inflation rate did not creep too far above its tolerance range compared to several advanced nations and regions.

The Economic Survey of India Report quotes, “As expected of a nation of this size, the Indian economy in FY23 has nearly “recouped” what was lost, “renewed” what had paused, and “re-energized” what had slowed during the pandemic and since the conflict in Europe.”

Disclaimer: the above article is based on the following sources of information: The Press Bureau Information of ESI and Live Mint