State of Indian Economy Report
(As per RBI bulletin – Mar 2023)
India’s economic resilience and growth momentum spark optimism (highlights the State of the Economy report)
The RBI’s State of the Economy report maintains a positive outlook for India, stating, “Unlike the global economy, India would not slow down – it would maintain the pace of expansion achieved in 2022-23. We remain optimistic about India, whatever the odds,” notes the report. This optimism suggests confidence in India’s ability to sustain growth even in the face of global economic challenges.
While a global economic slowdown or even a recession is anticipated in 2023, India has demonstrated resilience post-pandemic, gaining momentum since the second quarter of the current fiscal year.
The supply side reveals a seasonal uptick in agriculture, industry recovering from contraction, and services maintaining their momentum. However, challenges remain with consumer price inflation staying high and core inflation persisting despite a notable decrease in input costs, observed the report.
Base effects don’t reflect acceleration.
The end-February data release from the NSO suggests that India is better positioned than many other countries to face the challenging year ahead, primarily due to its resilience and reliance on domestic drivers. Despite global growth potentially slowing down or entering a recession in 2023, India has emerged from the pandemic stronger than expected, with a steady buildup of momentum since the second quarter of the current financial year.
The report points out that year-on-year growth rates may not accurately reflect this acceleration due to statistical base effects, which could mislead readers into thinking there is a sequential slowdown. Current forecasts, including those from the RBI, project India’s real GDP growth for 2023-24 to be between 6.0% and 6.5%.
However, the State of the Economy report notes that if at least 50% of the ₹35,000 crore tax relief proposed in the Union Budget is used for consumption, and if even a third of the additional allocation of ₹3.2 lakh crore budgeted for effective capital expenditure adds to gross fixed capital formation, India’s real GDP could rise to ₹170.9 lakh crore in 2023-24, higher than the currently projected ₹169.7 lakh crore. This scenario highlights the potential of the Indian economy, and clearly shows that the Indian economy’s underpinnings for growth are coming from the domestic economy and consumption rather than the global markets.
India and China lead global growth.
There has been a shift in the drivers of global growth in 2022, according to the RBI’s State of the Economy report. Emerging Market Economies (EMEs), led by India and China, are projected to account for about 80% of global growth in 2023, with India contributing nearly 17%. The report’s model-based nowcast projects a positive global growth momentum of 0.3% in Q1 2023.
High-frequency indicators show that the global composite Purchasing Managers’ Index (PMI) increased to 52.1 in February 2023, reflecting a broad-based pick-up across geographies and marking the first expansion in six months.
This expansion was primarily led by services, with manufacturing also expanding for the first time since July 2022 as supply chain constraints eased and economic activity was released from pandemic restrictions.
In terms of global manufacturing PMIs, EMEs registered expansion while Advanced Economies (AEs) remained in contraction. Services, on the other hand, recorded a more broad-based expansion. India consolidated its position amongst the top performers of PMI expansion in both manufacturing and services.
The RBI’s State of the Economy report acknowledges that while projections indicate faster growth in emerging market economies (EMEs) compared to advanced economies (4.0% vs. 1.2%, as per the IMF), EMEs remain highly vulnerable to spillovers from tightening policies by systemic central banks. Additionally, many EMEs face challenges such as food and energy insecurity and debt distress.
Inflation remains a sticky thorn.
EMEs have taken the lead in combating inflation, and in several countries, it has started to decline. However, the issue remains unresolved.
Risks to financial stability from currency depreciation and debt servicing might shift policy focus away from the more significant problem. If inflation escapes control and rises again, it will be more challenging for EMEs to get their policies right.
Looking forward, the geopolitical fault lines may reshape global value chains and shift production bases of strategic and high-tech products. As a result, Asia could emerge as a new growth centre for both manufacturing and international trade.
But recovery is stronger
Further, according to the National Statistical Office (NSO), the pandemic recovery has been stronger than anticipated, primarily driven by private consumption and a rebound in government consumption during 2021-22. The improvement on the supply side has been more broad-based, led by services and followed by industry.
In the current financial year, positive real GDP momentum from Q2 of 2022-23 was maintained in Q3. However, unfavorable statistical base effects slowed headline growth in Q3.
Private consumption might decline further due to elevated inflation, while investment needs to be regenerated from private sources alongside public sector efforts. On the supply side, agriculture and services provide a silver lining, even as industry experiences moderation.
The report also reveals that India’s per capita GDP grew by 14.7% in nominal terms and 5.9% in real terms in 2022-23. Over the last decade, these growth rates were 9.5% and 4.5%, respectively, indicating an improvement in livelihoods. In US dollar terms, India’s per capita GDP has crossed $2,450, signifying progress towards becoming a middle-income economy.
The report suggests that if the gap between investment and saving, which flipped from a 0.8% GDP gap in 2019-20 to a surplus of 1.0% in 2020-21 and then a gap of 1.2% in 2021-22, indicates a new trend, India’s growth prospects could improve.
Some of the micro-indicators also reveal an optimistic momentum in economic activity. E-way bill volumes and toll collections remained high despite February being the shortest month. Electricity generation recorded strong growth in February 2023 as peak demand increased due to a rise in the mean temperature.
Daily average fuel consumption soared to its highest level in February 2023 (since the inception of the series in April 1998), with increased demand from industry and transport sectors. Retail sales increased year-on-year, but the pace moderated sequentially, although February sales were the highest since 2019.
Two-wheeler sales went up by 8.8%, with the electric vehicle (EV) segment maintaining the volumes recorded in the preceding two months. Better crop prices aided double-digit tractor sales growth for the third consecutive month. Sales of motorcycles and three-wheelers also picked up, with government schemes, subsidies, and aggressive financing boosting sales.
However, the NSO’s data release reveals that consumer price inflation for February 2023 remains high, with prices of cereals and milk contributing to recent inflation figures.
The good thing is that open market sales by the Food Corporation of India (FCI) have tempered wheat prices, which may continue into March. It is crucial to determine whether the rabi harvest will withstand the heatwave, untimely rains, and hailstorms. Meanwhile, core inflation persists despite a noticeable softening of input costs.
For the financial year 2023-24, inflation is expected to range between 5.0% and 5.6%, provided India withstands an El Nino event that could adversely affect the southwest monsoon amid global uncertainties.
Credit growth is firm
On the financial side, credit growth continues to be favourable for India. Despite some moderation in credit growth in recent months, the overall growth remains strong. According to the RBI’s State of the Economy report, metropolitan branches of banks, which account for nearly 60% of bank loans, led the lending expansion. Branches in urban, semi-urban, and rural areas also maintained double-digit credit growth on a year-on-year basis
Considering all the above in the RBI’s State of the Economy report, there is a lot to be optimistic about for India’s economic outlook. The resilience of the Indian economy, the steady growth momentum across sectors, and the country’s strong domestic drivers all contribute to a positive trajectory.
India’s focus on innovation, infrastructure, and financial inclusion further bolsters its position as a leader among emerging markets. While it’s crucial to remain vigilant of potential risks like inflation and external shocks, the overall sentiment surrounding India’s economy remains largely optimistic and growth-oriented.