Indian Economy Looks Promising Despite Global Headwinds

As global economies emerged from the pandemic and subsequent lockdowns for two preceding years, year 2022 was nothing short of challenging. Geopolitical tensions between Russia and Ukraine, extended Covid-induced lockdowns in China, and a multiyear high inflation in key economies weighed on the global economic growth in the year. In response to increasing inflation, the central banks, especially in advanced economies, aggressively tightened their monetary policy by sharply increasing their key policy rates.

However, economic performance in the Asia-Pacific (APAC) region seemed uneven in 2022. Largely, the economic growth in APAC was affected due to the slowdown in China. The country faced multiple headwinds – recurrent Covid-19 infections and lockdowns, unprecedented floods, stress in the property market etc. which in turn dampened the consumption and investments in the country.?Excluding China though, in countries such as Philippines, Malaysia, Thailand etc. the economic growth was fueled-in by a surge in private consumption and the resumption of international tourism.

Inflation has been a concerning factor in India as well, remaining above the Reserve Bank of India (RBI)’s upper tolerance limit of 6% for the most of FY23. In response to accelerating inflation, RBI increased its policy repo rate by 250bps, from 4% set during the pandemic, to 6.5% currently. However, amidst the global uncertainties and rising domestic inflation, India’s economy has been resilient so far, with the support of strong domestic macro-economic fundamentals. Consistent growth in key economic indicators such as GST collections, manufacturing PMI, credit demand etc. continue to indicate improving domestic consumption, which in turn has supported growth thus far. Moreover, the construction sector has remained in expansion while contact-intensive sectors such as hospitality, travel, recreation etc. are sharply rebounding from the pandemic lows.

In addition to the revival in domestic demand, central government initiatives, such as increasing the budgetary allocation to capital expenditure (CapEx), are also supporting India’s domestic economy. ?For FY24, the central government has allocated CapEx of Rs 10 Tn with primary focus on infrastructure. In sectors like infrastructure, CapEx has a high multiplier effect in the economy pertaining to employment creation and promoting growth. Besides, central government schemes to boost infrastructure and manufacturing such as – National Monetization Pipeline, Gati Shakti, and Product Linked Incentives (PLIs) will continue to promote CapEx upcycle support economic growth into the next financial year.?