Macro March 2023

What latest GDP release mean for us?

India’s economy stands resilient in the face of global uncertainties, though the path to recovery has turned longer.


After unabated challenges the last few years starting with the pandemic and continuing with geopolitical uncertainties, the global economy has been seeing a slump in growth. Further playing spoilsport is the rising interest rates across the world.

This has meant that there was very little room for the Indian economy to manoeuvre itself out of the sluggish global momentum resulting in a contraction in the latest GDP growth print which has shown a growth rate of 4.4%. However, a small consolation for the Indian economy is that this growth print is decent considering that the global economy, particularly Europe, has been hit by a sharp slowdown.

While the deceleration has been on anticipated grounds, it has led to some concerns about the country’s growth prospects. Nevertheless, considering that high frequency indicators in the domestic economy are showing resilience, the decline is likely to be temporary and may even have some beneficial effects on the economy. It may be pertinent to note that the contraction in GDP has come on the back of a higher base seen during the post pandemic recovery last year.


Navigating the slowdown

Still, the current print is lower than the 6.3% growth in the July-September 2022 quarter. A contraction in the manufacturing sector and low private consumption expenditure were the primary reasons for this decline. The manufacturing sector, which is a crucial driver of India’s economic growth, witnessed a dip of 1.1 percent in the third quarter of this fiscal compared to a growth of 1.3 percent in the year-ago period.

This decline has had a significant impact on the country’s overall GDP growth. Manufacturing for exports seems to have also taken a hit due to a contraction in global demand.

However, some domestic growth drivers have been resilient. Utilities and construction growth showed a jump coming in at 8%. Services sector has also shown good growth as demand is normalising, which has resulted in the hotels and transport sector recording a good growth momentum at 9.7%. Besides, agriculture and mining have also shown modest growth rates of 3.7%.

There are some important takeaways suggesting that the Indian economy will be able to pull through during the current global slowdown. India’s economy is insulated by the fact that domestic consumption will continue to lend support to the economy. Some of the high frequency consumption indicators continue to show resilience. Auto sales increased 16% in February this year with a good part of growth coming from two- and four-wheelers.

On the other hand, it is heartening that gross fixed capital formation has remained strong at 8.3%, and suggests that private investment has a reason to be optimistic. A rise in demand particularly in discretionary spends could see an increase in private capital expenditures. One more favourable indicator is the government increased budget for capital expenditures to the tune of Rs 10 lakh crore in FY24. This will go a long way in supporting GDP growth in the coming year.

Further, 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. This has been a significant growth driver for the Indian economy over the past quarter. Goods and Services Tax collection has increased by about 24% till January this year, which shows that the government has headroom to ramp up spends if need be in the coming year.

The recent Economic Survey tabled 2022-23 has projected a baseline GDP growth of projected a baseline GDP growth of 6.5 percent in real terms for the year ending March 2024. The economy is also expected to grow at 7 percent in real terms for the year ending March 2023, following an 8.7 percent growth in the previous financial year.


Challenges and opportunities ahead

No doubt, the Indian economy will have to worry about the headline and global inflation, which has been playing truant for some time now. Despite the Fed throwing its might and tightening considerably over the past year, inflation has been persistently high in the US and around the globe. Recently, the US Fed indicated that its tightening cycle is expected to continue.

That would mean emerging markets will continue to remain under tremendous pressure in the coming year, and India given that it’s not completely insulated from the global turmoil, may be faced with some choppy weather. As a result, domestic interest rates and inflation could play spoil sport if the tightening cycle goes out of hand, which can impact domestic consumption.

All in all, it suggests that the path of India’s recovery has got longer. However, given India’s macro-economic indicators, the silver lining is that while the global economy could continue to witness a slowdown, India will be able to keep its head above water and emerge resilient as one of the fastest growing global economies.

Overall, while there are challenges ahead for the Indian economy, there are also significant opportunities to continue on the growth path, particularly in the MSME sector, and construction and allied activities. With the right policy support and a significant push from the government, India may well achieve its growth targets of FY24, and continue on a path of long-term economic development.

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