Indian economy prospects in 2023 and ahead and comparing with other peer countries

Indian economy will recuperate in 2023 and ahead.

The Reserve Bank has projected India's economic growth at 6.4% for 2023-24, broadly in line with the estimate of the Economic Survey tabled in Parliament.19-Feb-2023 former Vice-Chairman Rajiv Kumar. India is likely to clock 6% growth rate next fiscal and the country can persevere with a high growth rate because of several reforms undertaken during the last eight years by the Narendra Modi Government, former Niti Aayog Vice-Chairman Rajiv Kumar said on February 19. He further said major risks going forward will emerge from a synchronized downturn in the North American and European economies. “India has a good opportunity to maintain a high growth rate because of the reforms undertaken during the last eight years. We will manage to grow at 6% in 2023-24,” he told?PTI?in an interview. According to Mr. Kumar, there are several downside risks, especially in the context of an uncertain global situation. “These will have to be undertaken through careful policy measures designed to aid our export efforts and at the same time improve the flow of private investment both from domestic sources as well as from foreign sources,” he said. The Reserve Bank has projected India’s economic growth at 6.4% for 2023-24, broadly in line with the estimate of the Economic Survey tabled in Parliament. Gross Domestic Product (GDP) growth is estimated at 7% in 2022-23, according to the first advance estimate of the National Statistical Office (NSO). The Economic Survey 2022-23 projected a baseline GDP growth of 6.5% in real terms for the next fiscal.

Replying to a question on high inflation, Mr. Kumar said the Reserve Bank has said that it will ensure that the inflation rate is brought under control.

?“Also, a good winter crop will help in keeping the food prices low,” he noted. The RBI lowered the consumer price inflation (CPI) forecast to 6.5% for the current fiscal from 6.7%. India’s retail inflation in January was 6.52%. A question on India’s rising trade deficit with China, Mr. Kumar suggested that New Delhi should re-engage with Beijing on finding greater market opportunities and access in the Chinese market. “There are several products which India can export more to China.

“That requires a considered re-engagement,” he emphasized. According to Mr. Kumar, it would be feasible for India to restrict imports from China because most imported products are quite essential imports. Indian and Chinese troops clashed along the Line of Actual Control (LAC) in the Twang sector of Arunachal Pradesh on December 9, 2022, and the face-off resulted in “minor injuries to a few personnel from both sides. According to recent data released by Chinese customs, the trade between India and China touched an all-time high of $135.98 billion in 2022, while New Delhi’s trade deficit with Beijing crossed the $100 billion mark for the first time despite frosty bilateral relations. Replying to a question on the Adani crisis, Mr. Kumar said a robust public-private partnership is essential for developing infrastructure at the rate required. “I don’t think that one such incident with a private family company will hamper that effort.?“... There are a large number of private sector companies who have participated in infrastructure development in the past and will continue to do so going forward,” he observed. Adani group has been under severe pressure since the U.S. short-seller Hindenburg Research on January 24, accused it of accounting fraud and stock manipulation, allegations that the conglomerate has denied as “malicious”, “baseless” and a “calculated attack on India”.

While listed companies of the group lost over $125 billion in market value in three weeks, opposition parties inside and outside Parliament attacked the BJP Government for the meteoric rise of the ports-to-energy conglomerate. Stocks of most group firms have recovered in the last couple of days.

India economic outlook

Healthy domestic drivers will help India post strong growth of 6.5%–6.9% in FY2022–23, but global economic exigencies may cast their shadows on the outlook for the rest of 2023. Apart from the customary change in dates, very little in the new year feels different from the one gone by for the global economy. Geopolitical uncertainties continue unabated, a legacy of the last year, and there’s wide consensus among economists now that the global economy is on the verge of entering a phase of severe slowdown. It is unlikely that India will remain insulated from these developments. But here is a bit of good news as far as India’s economy goes—there are enough reasons to be optimistic about India’s economic outlook in 2023. In particular, healthy domestic drivers will likely help the country post reasonably strong growth this year. The private sector balance sheet has improved over the past couple of years, implying that the private sector is poised to increase spending, which can boost capex as and when the investment cycle picks up. Besides, corporate deleveraging has improved banks’ balance sheets, aiding the banking system to come out of the asset quality cycle. Furthermore, high goods and services tax (GST) and direct tax collections have provided the government ammunition to spend and cushion the impact of the impending global slowdown and keep the economy buoyant. Consumer demand among the affluent class remains strong as is evident from the robust growth in the retail industry and the better profit performance of consumer staples and discretionary companies in recent quarters. Also, recent labor market data suggests a strong rise in labor force participation and job creation in certain sectors. However, job growth has to sustainably improve to translate into durable demand growth.

The path to sustained recovery, however, will be distorted, given three major challenges India is likely to face. First, inflation will likely remain high this year even though it may have already peaked or may peak soon. Second, aggressive tightening of monetary policies across the central banks of advanced economies is likely to cause a global slowdown this year, impacting domestic investment and consumer demand as the proclivity to save increases. Tighter liquidity conditions may also result in capital outflows and a rising imbalance in the balance of payment account. Third, the labor market is yet to improve, and the pandemic’s seemingly imminent return remains a wild card that could derail the strong recovery in the services sector as well as consumer demand, both of which are critical to GDP growth. Given that the economy turned out to be weaker in H1 FY 2022–23 than we had anticipated, we have revised our outlook. We expect India to grow in the range of 6.5%–6.9% in FY 2022–23 and 5.8%–6.3% in FY 2023–24. Considering the extent of volatility associated with the global and domestic economy, we are restricting the duration of our projection to just a year ahead. Hopefully, we will be better positioned to predict beyond a year by the next outlook release. There is more to the data than meets the eye.

India’s GDP grew by 6.3% year over year (YoY) in the July–September quarter of FY23. While this growth appears substantially lower compared to the April–June quarter (13.5%), strong growth in the latter was because of the low base effect. In 2021 this quarter, the economy was severely impacted by the second wave of the infection and consequent mobility restrictions, which dragged economic activity down. It is heartening to see that, from the expenditure side of accounting, gross fixed capital investment and private consumption remained robust and grew by 10% YoY. Participation of the state governments and the private sector in investment spending was low. Strong growth in private consumption, especially in the discretionary segment, is a good sign and may cue the private sector to boost investment, which has remained muted despite higher capacity utilization. All other drivers weighed on growth. Negative inventories suggest that businesses preferred to exhaust their stocks, which means that they will have to ramp up production if consumer spending holds up.1

Astonishing, government spending contracted by 4.4%, taking away a chunk of the GDP- growth in Q2. This was despite strong revenue growth in the quarter. Both exports and imports increased, but the latter accelerated faster thereby widening the current account deficit. On the production side, gross value added (GVA) grew by 5.6%. Contraction in manufacturing and mining sectors (–4.3% and –2.8% YoY, respectively) weighed on the overall sectoral contributions to economic activity. In our previous outlook, we highlighted the issue around the possible low contribution of manufacturing, despite the sustained push by the government. The revival of the services sector by 9.3% helped boost growth, with the “trade, hotels, transport, communication, and services related to broadcasting” sectors witnessing very strong growth of 14.7%. That said, these sectors remained below the pre-pandemic trend levels (and are the only services sectors that have not yet caught up). Agriculture grew at a healthy rate of 4.6% despite the unseasonal and uneven pattern of rains.

High-frequency data provide mixed signals

October–December has been a busy quarter for consumers, and those who have been traveling outside or recently visited shopping malls may have witnessed a spurt in consumer spending. The latest economic data, however, provides mixed signals. On the positive side, the manufacturing purchasing managers’ index (PMI) in December rose to the highest levels in over two years. This comes after two months of low industrial production numbers. The falling inventory levels and strong demand during the festive quarter were bound to push production up. Capacity utilization in the manufacturing sector is now above its long-run average (although it varies quite a lot across sectors), which bodes well for fresh investment activity in creating additional capacity. According to the Center for Monitoring Indian Economy (CMIE), the total value of new private sector investment proposals in 2022 saw an uptick—in fact, this value reached the highest level since 1996, with proposals worth INR 19.7 trillion made so far. That said, the number of proposals has been relatively small. This could mean that businesses have resources to invest but are focused and prudent about investments. They are spending on select but high-valued projects. Credit growth, meanwhile, remains healthy as banks with better balance sheets and margins are willing to lend. On the other hand, exports visibly slowed down in October and November 2022 and are likely to moderate even further this year. The INR is still struggling to anchor itself against the US dollar. Lately, the USD index has declined, but INR has not seen a reversal in valuation against the dollar. The consumer price index (CPI) may have peaked but it is too early to say if it has stabilized. For the Indian economy to post a strong recovery, it is imperative that inflation remains on a sustained downward path. Foreign investment, which fell to its lowest after June 2020, is gathering pace moderately. November was a strong month on this front but flows tapered in December. Last, but not least, although job creation has improved, incomes haven’t seen the rise needed to beat inflation. Moreover, job opportunities and wage growth among the low- and middle-income populations grew modestly.

?India learns to make lemonade from lemons

?Not all headwinds are meant to be challenges. For instance, globally, nations and multinationals are emphasizing resilience in, diversification of, and securing their supply chains in light of geopolitical developments and global exigencies. India presents huge potential and opportunities as an export hub and investment destination in the manufacturing and services space. India’s recent trade agreements are aimed at integrating the manufacturing sector with the global supply chain. Consequently, there has been a healthy rise in foreign direct investment (FDI) equity flows from Japan, Singapore, the United Kingdom, and the United Arab Emirates in H1 FY2022–23, even as FDI from the United States fell. This points to a rising confidence among global investors to invest in India and India’s inflows are becoming more diversified. More so, low asset values have led healthy companies to consolidate positions and enter new segments.

Defying trends, India registered record mergers and acquisition deals in 2022, with the biggest transactions seen in banking, cement, and aviation. Many conglomerates entered new businesses, while brick-and-mortar companies partnered with technology firms. India’s trade with Russia has shot up post the Russia-Ukraine war. According to Reuters, imports of the top five principal commodities have increased since the war as India imported these commodities at discounts.?India also benefits from the fact that its refineries are best suited to process Russian oil.

What to expect in 2023

The path to recovery for the Indian economy will be longer with consumer spending moderating owing to pressures from inflation and higher borrowing rates. Investments will likely be the biggest growth drivers, primarily driven by the government sector capital spending, while the private sector may take some time to join the investment. The private sector will likely continue with focused spending on select projects in the meantime. The key assumptions for the forecast remain in line with what they were in the previous outlook. ?Considering that the economy became to be weaker in H1 FY 2022–23 than we had expected, we have revised our outlook by 0.2% FY. The downside risks for the currency and the current account balance have also increased. Sadly, hard with each revision, the actual GDP gets further away from the no–COVID-19 GDP trend, in which may be difficult to reverse. A rise in prices may peak soon but sustained demand growth will keep pressure on supply, leading to overheating of the economy. A high base effect may aid in easing inflation, but it will remain on or above the RBI’s comfort levels (4% + or –2% YoY) this year and even the next, before easing in the second half of 2024.

?Important ?assumptions

Optimistic scenario:?The Russia-Ukraine crisis does not escalate but prolongs for a long period. The COVID-19 spread remains contained and does not have a meaningful economic impact. Growth in the US and the EU slows down over a tighter monetary policy. Investors fact in uncertainties and focus on growth potential to decide on investments in 2023. The US Fed may take a pause at raising policy rates, as inflation seems to be slowing. The RBI balances growth, inflation, depreciating currency against the US dollar, and capital flight by raising rates. The government’s efforts toward consolidation of expenses might get difficult this year. But fiscal deficit will remain range-bound. There’s a partial pass-through of higher food and oil prices (with a lag) to consumers.

Pessimistic scenario:?The Russia-Ukraine crisis continues for a prolonged period. Tensions become far and wide with several Important nations getting directly involved in the war. The United States and Europe enter a recession. The rising infection in China spreads around the world, leading to a return of strict mobility restrictions in several economies. A prolonged crisis has second-order implications on financial stability and supply chain disruptions. Government absorbs the larger share of the price rise as inflation spirals up. The RBI goes with a hike or two but retracts later.

Improve supply chain to control inflation:?While there will be a continued fight against inflation, India needs sector-specific targeted efforts to manage supply, and therefore, inflation. For instance, a large part of inflation is due to food prices, and the government must make efforts toward building infrastructure to optimize the food and agribusiness supply chain. Developing market linkages by identifying and connecting farmers with buyers and facilitating contract negotiations between the two could be critical.?

?Incentivize the services sector for job creation:?The government’s focus has rightly been on sectors such as infrastructure, construction, and manufacturing that create jobs for workers across all skills. However, the services sector has huge potential—be it in retail, trade, or information technology. So, while India continues its focus on various schemes such as Product Liked Incentive to promote manufacturing and sunrise sectors, it will have to also focus on the services sector where India is competitive and has a comparative advantage. An effort toward building global in-house centers of the world and adopting agility in doing business could revive the services sector and create employment opportunities.

?Find new sources of revenue:?The government will have to support growth by bolstering spending to cushion the impact of global exigencies the global economic slowdown. Besides, the government will have to continue the momentum in infrastructure spending to ensure jobs and asset creation. ?While tax revenues have been strong, due to the economic revival and inflation, the government will have to monetize assets so that it can front-load its expenses this year. While the government exceeded its asset monetization target in FY22, it is likely to miss the target for the ongoing fiscal. Going forward, it will have to focus on states with large monetization bases, identify possible assets that can be monetized, and also bring in strategic partnerships with private players to allow private capital to flow into select sectors. Prepare India to recuperate when the global economy recovers:?The government needs to focus on finishing ongoing infrastructure projects and strengthening sectors with strong linkages and multiplier effects. While progress in several infrastructure projects has been good so far, highway networks are yet to gain momentum, and progress in power and energy has been modest. The emphasis should be on improving financial inclusion and technology connectivity beyond Tier-1 cities. Besides, focusing on assisting the micro, small, and medium enterprises sectors could help India achieve all-inclusive growth.

India's economy impairments,?Eurozone inflation falls less than expected, and other economies: Shaping the Future of Financial and Monetary Systems

?India's economic growth slows; Eurozone inflation falls less than expected; Ukraine predicts GDP growth this year; China becoming increasingly ambitious with a 2023 growth target. India's economic growth slowed further in October-December, but the government is retaining its growth forecast of 7% for 2022-2023 – a level that would make it the world's fastest-growing major economy. Year-on-year growth in Asia's third-largest economy fell to 4.4% in the quarter from 6.3% in July-September. The slowdown resulted from an easing of pent-up pandemic-era demand, continuing weakness in the manufacturing sector, and the fading of the pandemic's low base effect. The IMF and the World Bank project India as the fastest-growing major economy in 2023, but India has recorded slower economic growth so far.?The manufacturing sector contracted by 1.1%, marking a second straight contraction and reflecting lower profit margins and weaker exports as countries struggle with inflation. Declining global demand and?monetary tightening by the Indian central bank could further drag down economic growth?this year, economists at the bank have warned. But India's chief economic advisor, V. Ananthan Nageswaran, says the country is still on track for 7% growth and that 4.0-4.1% is possible in January-March. The IMF and the World Bank project India as the fastest-growing major economy in 2023. India's private consumer spending, which makes up around 60% of GDP, rose by just 2.1% year-on-year in the December quarter, down from the revised 8.8% growth in the previous quarter. And capital investment rose 8.3% compared to a revised 9.7% for July-September. Some economists suggest that these numerous?revisions to past data are making the slowdown in India's GDP growth look more severe?than it actually is. The revisions have created a higher base for October-December data to be measured against, they say, adding that growth is evolving as expected and may not sway the central bank to pause rate hikes.

. Eurozone hit with higher-than-expected inflation

Eurozone inflation fell less than expected in February, and underlying price growth surged, reinforcing the case for the European Central Bank (ECB) to keep raising interest rates at a brisk pace. Consumer price inflation in the bloc eased to 8.5% in February from 8.6% a month earlier, as a big fall in energy costs offset a price surge in nearly all other areas. But it still came in above expectations for 8.2%economists. Although overall inflation is well below the double-digit highs of October, it continues to broaden, fueling fears that the earlier surge has seeped into the economy via so-called second-round effects, making it more difficult to root out. Underlying inflation, which filters out volatile food and fuel prices, jumped to 5.6% in February from 5.3% a month earlier, putting it well above expectations for a steady reading.

Eurozone inflation is falling when it comes to energy, but proving stubborn in other areas.?The rice growth in services, the biggest component in core inflation,?accelerated to 4.8% from 4.4%. This is a big worry, as the sector is especially sensitive to wage growth, and the rise suggests an acceleration in labor costs. However,?ECB Chief Economist Philip Lane says the bank is starting to win its fight against inflation. He says that higher interest rates are working their way through the economy, and this is weighing on the price of services and other core goods, excluding fuel and food. The ECB has promised another half-percentage-point rate hike in interest rates this month, and Lane says the bank will not end rate hikes until it is confident price growth is heading back towards 2%. The Bank's President, Christine Lagarde, says the?rate increases may need to persist beyond this month.

?NEWS IN BRIEF: STORIES ON THE ECONOMY FROM AROUND THE WORLD

Ukraine's central bank predicts that the country's GDP will grow by 0.3%?this year, while the economy ministry forecasts 3.2% growth. However, access to reliable power supplies is proving an obstacle for many businesses. The war has also devastated key sectors – Ukraine was the world's 14th largest steel producer before the war, but leading firms have had facilities destroyed and been declared bankrupt. Agriculture accounted for 12% of GDP before the war, but grain exports have fallen 29.3% on the year in the current season. Prices for?wheat futures have fallen to their lowest in 17 months, thanks to strong near-term supplies, Bloomberg reports. The most active contract has dropped by 1.6% to reach $7.10 a bushel, and wheat prices are on course for a 6% decline this month, which would be the biggest monthly dip since November.?World food prices fell in January for the 10th month in a row.

China's manufacturing activity expanded at its fastest pace in more than a decade?in February, smashing expectations as production soared following the lifting of COVID-19 restrictions late last year. The manufacturing purchasing managers' index (PMI) shot up to 52.6 last month, from 50.1 in January, with any number above 50 indicating expansion. And?China is becoming increasingly ambitious with its 2023 growth target, aiming as high as 6% to boost investor and consumer confidence and build on a promising post-pandemic recovery.

Japan's lower house of parliament has passed a?record JPY114.4 trillion ($839.3 billion) budget?for the next fiscal year. The move is likely to further increase the country's debt –?Japan already has the world's highest debt-to-GDP ratio. The budget features record military spending as well as record welfare spending for a fast-aging population.

South Korea's factory activity contracted?for an eighth month in February, highlighting weak domestic and global economic conditions. But the government is promising to?work to boost exports to support the economy. South Korea's official forecast is for exports to drop 4.5% in 2023 compared with last year. Exports for January and February fell 12% on the year.

Retail theft has hit record levels in Australia, underscoring concerns raised by analysts and social researchers that surging living costs will drive up crime. The theft is putting pressure on grocery chains that are already struggling with soaring supply costs and freight blockages.

What is the World Economic Forum doing to help ensure global food security

British grocery inflation hit a new record of 17.1%?in the four weeks to 19 February, dealing another blow to consumers struggling with a cost-of-living crisis. Market researcher Kantar says UK households now face an additional ￡811 ($978) on their annual shopping bills if they don't change their behavior to cut costs.

The?United Arab Emirates economy expanded by 7.6%?last year, according to a senior official. This is about double the rise recorded in 2021, as the Gulf state rebounded sharply from the pandemic. But a slowdown is forecast this year because of a more uncertain oil price outlook and a challenging global macroeconomic environment.

Australia's economy grew at its weakest pace?for a year in October-December as strong trade was offset by rising interest rates and high inflation. Real GDP rose by 0.5%, compared with 0.7% in the previous quarter. Economic output excluding international trade fell 0.5%, as rising prices eroded consumers' purchasing power and led them to save less.

Global rating agency Moody's has?cut Pakistan's sovereign credit rating by two notches?amid international loan negotiations, saying the country's increasingly fragile liquidity "significantly raises default risks". The cash-strapped country is in talks with the IMF to secure a?$1 billion loan.

Thailand's economy is expected to grow 3.8%?this year, helped by a rebound in the vital tourism sector, while inflation should cool to its target range, its finance minister says.

?Conclusion

Globalization needs a shake-up in the post-COVID world, and?purpose-led globalization should be the new name of the game. Capital markets will have a key role to play in enabling this new phase of globalization. The Indian relatively healthy?Gross Domestic Product (GDP) growth?economy is projected to record 6.9% in 2022-23 and?inflation?has started moderating. In 2020, the main event was the nationwide lockdown in the wake of the?first wave of the?Covid-19 pandemic?that determined the shape of India’s economy. In 2021, it was the?vicious?second wave of Covid?that shaped our economy and recovery. In 2022, it was?Russia’s invasion of Ukraine?that largely determined the fate of India’s economy.

As a result, issues such as inflation, the rupee’s exchange rate, and India’s forex reserves dominated more than the?routine concerns about GDP growth.

?INFLATION:

Headline Retail inflation was already above 6% when 2022 started. The?inflation situation flared up after Russia’s invasion?of Ukraine. In April 2022, retail inflation?hit an eight-year high.?By the time RBI decided to?raise?Repo Rates?in a hurriedly convened?MPC (Monetary Policy Committee)?meeting in May 2022. The?US and the actions of the US Federal Reserve?were cited as prime factors for global inflation.

Rupee’s Exchange Rate and Forex Reserves:

Many of India’s macroeconomic indicators started getting adversely affected because of?higher?crude oil prices. Trade deficits started rising as the financial year started and there were concerns?about?India’s Current Account Deficit (CAD),?Forex Reserves,?and?Balance of Payment. Eventually, the rupee hit the politically sensitive 80-to-a-dollar mark. But the rupee was not the?only currency losing ground against?the dollar. The dollar had risen against the?euro to achieve parity

In India,?manufacturing continues to be wobbly.?Factory output, as measured by the?Index of Industrial Production (IIP), slumped to a 26-month low in the festive month of October 2022. Core sector growth for October was just 0.1%, the lowest for 20 months.?That has led to a rapid downward revision of India’s growth projections?by analysts for the next fiscal. Capacity utilization — the ratio of actual output to the potential output that can be produced under normal conditions — has shown a minor uptick but continues to hover around the 75% mark Unless this goes up on a?sustained basis, private investments are unlikely to pick up perceptibly. There is continuing?distress?among the?Micro, Small, and Medium Enterprises (MSME)?firms, reflecting the deep cleavages in industrial recovery where the bigger companies are doing far better than the smaller firms. The capital expenditure of the?states has remained weak.?Investments by states typically tend to have a higher multiplier effect. India’s significant dependence on imported energy, at 4% of the country’s GDP, is a?challenge that shows up on the balance of payments side.?A current account deficit of well over 3% is projected for FY23. The buoyancy in farm output notwithstanding, rural wages contracted for the ninth consecutive month in September, pointing to?continuing distress in the hinterland. Indian economy will recuperate in 2023 and ahead.

The Reserve Bank has projected India's economic growth at 6.4% for 2023-24, broadly in line with the estimate of the Economic Survey tabled in Parliament.19-Feb-2023 former Vice-Chairman Rajiv Kumar. India is likely to clock a 6% growth rate next fiscal and the country can persevere with a high growth rate because of several reforms undertaken during the last eight years by the Narendra Modi Government, former Niti Aayog Vice-Chairman Rajiv Kumar said on February 19. He further said major risks going forward will emerge from a synchronized downturn in the North American and European economies. “India has a good opportunity to maintain a high growth rate because of the reforms undertaken during the last eight years. We will manage to grow at 6% in 2023-24,” he told?PTI?in an interview. According to Mr. Kumar, there are several downside risks, especially in the context of an uncertain global situation. “These will have to be undertaken through careful policy measures designed to aid our export efforts and at the same time improve the flow of private investment both from domestic sources as well as from foreign sources,” he said. The Reserve Bank has projected India’s economic growth at 6.4% for 2023-24, broadly in line with the estimate of the Economic Survey tabled in Parliament. Gross Domestic Product (GDP) growth is estimated at 7% in 2022-23, according to the first advance estimate of the National Statistical Office (NSO). The Economic Survey 2022-23 projected a baseline GDP growth of 6.5% in real terms for the next fiscal.

Replying to a question on high inflation, Mr. Kumar said the Reserve Bank has said that it will ensure that the inflation rate is brought under control.?“Also, a good winter crop will help in keeping the food prices low,” he noted. The RBI lowered the consumer price inflation (CPI) forecast to 6.5% for the current fiscal from 6.7%. India’s retail inflation in January was 6.52%. A question on India’s rising trade deficit with China, Mr. Kumar suggested that New Delhi should re-engage with Beijing on finding greater market opportunities and access in the Chinese market. “There are several products which India can export more to China.

“That requires a considered re-engagement,” he emphasized. According to Mr. Kumar, it would be feasible for India to restrict imports from China because most imported products are quite essential imports. Indian and Chinese troops clashed along the Line of Actual Control (LAC) in the Twang sector of Arunachal Pradesh on December 9, 2022, and the face-off resulted in “minor injuries to a few personnel from both sides. According to recent data released by Chinese customs, the trade between India and China touched an all-time high of $135.98 billion in 2022, while New Delhi’s trade deficit with Beijing crossed the $100 billion mark for the first time despite frosty bilateral relations. Replying to a question on the Adani crisis, Mr. Kumar said a robust public-private partnership is essential for developing infrastructure at the rate required. “I don’t think that one such incident with a private family company will hamper that effort.?“... There are a large number of private sector companies who have participated in infrastructure development in the past and will continue to do so going forward,” he observed. Adani group has been under severe pressure since the U.S. short-seller Hindenburg Research on January 24, accused it of accounting fraud and stock manipulation, allegations that the conglomerate has denied as “malicious”, “baseless” and a “calculated attack on India”.

While listed companies of the group lost over $125 billion in market value in three weeks, opposition parties inside and outside Parliament attacked the BJP Government for the meteoric rise of the ports-to-energy conglomerate. Stocks of most group firms have recovered in the last couple of days.

India economic outlook

Healthy domestic drivers will help India post strong growth of 6.5%–6.9% in FY2022–23, but global economic exigencies may cast their shadows on the outlook for the rest of 2023. Apart from the customary change in dates, very little in the new year feels different from the one gone by for the global economy. Geopolitical uncertainties continue unabated, a legacy of the last year, and there’s wide consensus among economists now that the global economy is on the verge of entering a phase of severe slowdown. It is unlikely that India will remain insulated from these developments. But here is a bit of good news as far as India’s economy goes—there are enough reasons to be optimistic about India’s economic outlook in 2023. In particular, healthy domestic drivers will likely help the country post reasonably strong growth this year. The private sector balance sheet has improved over the past couple of years, implying that the private sector is poised to increase spending, which can boost capex as and when the investment cycle picks up. Besides, corporate deleveraging has improved banks’ balance sheets, aiding the banking system to come out of the asset quality cycle. Furthermore, high goods and services tax (GST) and direct tax collections have provided the government ammunition to spend and cushion the impact of the impending global slowdown and keep the economy buoyant. Consumer demand among the affluent class remains strong as is evident from the robust growth in the retail industry and the better profit performance of consumer staples and discretionary companies in recent quarters. Also, recent labor market data suggests a strong rise in labor force participation and job creation in certain sectors. However, job growth has to sustainably improve to translate into durable demand growth.

The path to sustained recovery, however, will be distorted, given three major challenges India is likely to face. First, inflation will likely remain high this year even though it may have already peaked or may peak soon. Second, aggressive tightening of monetary policies across the central banks of advanced economies is likely to cause a global slowdown this year, impacting domestic investment and consumer demand as the proclivity to save increases. Tighter liquidity conditions may also result in capital outflows and a rising imbalance in the balance of payment account. Third, the labor market is yet to improve, and the pandemic’s seemingly imminent return remains a wild card that could derail the strong recovery in the services sector as well as consumer demand, both of which are critical to GDP growth. Given that the economy turned out to be weaker in H1 FY 2022–23 than we had anticipated, we have revised our outlook. We expect India to grow in the range of 6.5%–6.9% in FY 2022–23 and 5.8%–6.3% in FY 2023–24. Considering the extent of volatility associated with the global and domestic economy, we are restricting the duration of our projection to just a year ahead. Hopefully, we will be better positioned to predict beyond a year by the next outlook release. There is more to the data than meets the eye.

India’s GDP grew by 6.3% year over year (YoY) in the July–September quarter of FY23. While this growth appears substantially lower compared to the April–June quarter (13.5%), strong growth in the latter was because of the low base effect. In 2021 this quarter, the economy was severely impacted by the second wave of the infection and consequent mobility restrictions, which dragged economic activity down. It is heartening to see that, from the expenditure side of accounting, gross fixed capital investment and private consumption remained robust and grew by 10% YoY. Participation of the state governments and the private sector in investment spending was low. Strong growth in private consumption, especially in the discretionary segment, is a good sign and may cue the private sector to boost investment, which has remained muted despite higher capacity utilization. All other drivers weighed on growth. Negative inventories suggest that businesses preferred to exhaust their stocks, which means that they will have to ramp up production if consumer spending holds up.1

Astonishing, government spending contracted by 4.4%, taking away a chunk of the GDP- growth in Q2. This was despite strong revenue growth in the quarter. Both exports and imports increased, but the latter accelerated faster thereby widening the current account deficit. On the production side, gross value added (GVA) grew by 5.6%. Contraction in manufacturing and mining sectors (–4.3% and –2.8% YoY, respectively) weighed on the overall sectoral contributions to economic activity. In our previous outlook, we highlighted the issue around the possible low contribution of manufacturing, despite the sustained push by the government. The revival of the services sector by 9.3% helped boost growth, with the “trade, hotels, transport, communication, and services related to broadcasting” sectors witnessing very strong growth of 14.7%. That said, these sectors remained below the pre-pandemic trend levels (and are the only services sectors that have not yet caught up). Agriculture grew at a healthy rate of 4.6% despite the unseasonal and uneven pattern of rains.

High-frequency data provide mixed signals

October–December has been a busy quarter for consumers, and those who have been traveling outside or recently visited shopping malls may have witnessed a spurt in consumer spending. The latest economic data, however, provides mixed signals. On the positive side, the manufacturing purchasing managers’ index (PMI) in December rose to the highest levels in over two years. This comes after two months of low industrial production numbers. The falling inventory levels and strong demand during the festive quarter were bound to push production up. Capacity utilization in the manufacturing sector is now above its long-run average (although it varies quite a lot across sectors), which bodes well for fresh investment activity in creating additional capacity. According to the Center for Monitoring Indian Economy (CMIE), the total value of new private sector investment proposals in 2022 saw an uptick—in fact, this value reached the highest level since 1996, with proposals worth INR 19.7 trillion made so far. That said, the number of proposals has been relatively small. This could mean that businesses have resources to invest but are focused and prudent about investments. They are spending on select but high-valued projects. Credit growth, meanwhile, remains healthy as banks with better balance sheets and margins are willing to lend. On the other hand, exports visibly slowed down in October and November 2022 and are likely to moderate even further this year. The INR is still struggling to anchor itself against the US dollar. Lately, the USD index has declined, but INR has not seen a reversal in valuation against the dollar. The consumer price index (CPI) may have peaked but it is too early to say if it has stabilized. For the Indian economy to post a strong recovery, it is imperative that inflation remains on a sustained downward path. Foreign investment, which fell to its lowest after June 2020, is gathering pace moderately. November was a strong month on this front, but flows tapered in December. Last, but not the least, although job creation has improved, incomes haven’t seen the rise needed to beat inflation. Moreover, job opportunities and wage growth among the low- and middle-income populations grew modestly.

?India learns to make lemonade from lemons

?Not all headwinds are meant to be challenges. For instance, globally, nations and multinationals are emphasizing resilience in, diversification of, and securing their supply chains in light of geopolitical developments and global exigencies. India presents huge potential and opportunities as an export hub and investment destination in the manufacturing and services space. India’s recent trade agreements are aimed at integrating the manufacturing sector with the global supply chain. Consequently, there has been a healthy rise in foreign direct investment (FDI) equity flows from Japan, Singapore, the United Kingdom, and the United Arab Emirates in H1 FY2022–23, even as FDI from the United States fell. This points to a rising confidence among global investors to invest in India and India’s inflows are becoming more diversified. More so, low asset values have led healthy companies to consolidate positions and enter new segments.

Defying trends, India registered record mergers and acquisition deals in 2022, with the biggest transactions seen in banking, cement, and aviation. Many conglomerates entered new businesses, while brick-and-mortar companies partnered with technology firms. India’s trade with Russia has shot up post the Russia-Ukraine war. According to Reuters, imports of the top five principal commodities have increased since the war as India imported these commodities at discounts.?India also benefits from the fact that its refineries are best suited to process Russian oil.

What to expect in 2023

The path to recovery for the Indian economy will be longer with consumer spending moderating owing to pressures from inflation and higher borrowing rates. Investments will likely be the biggest growth drivers, primarily driven by the government sector capital spending, while the private sector may take some time to join the investment. The private sector will likely continue with focused spending on select projects in the meantime. The key assumptions for the forecast remain in line with what they were in the previous outlook. ?Considering that the economy became ?to be weaker in H1 FY 2022–23 than we had expected, we have revised our outlook by 0.2% FY. The downside risks for the currency and the current account balance have also increased. Sadly, hard with each revision, the actual GDP gets further away from the no–COVID-19 GDP trend, in which may be difficult to reverse. A rise in prices may peak soon but sustained demand growth will keep pressure on supply, leading to overheating of the economy. A high base effect may aid in easing inflation, but it will remain on or above the RBI’s comfort levels (4% + or –2% YoY) this year and even the next, before easing in the second half of 2024.

?Important ?assumptions

Optimistic scenario:?The Russia-Ukraine crisis does not escalate but prolongs for a long period. The COVID-19 spread remains contained and does not have a meaningful economic impact. Growth in the US and the EU slows down over a tighter monetary policy. Investors fact in uncertainties and focus on growth potential to decide on investments in 2023. The US Fed may take a pause at raising policy rates, as inflation seems to be slowing. The RBI balances growth, inflation, depreciating currency against the US dollar, and capital flight by raising rates. The government’s efforts toward consolidation of expenses might get difficult this year. But fiscal deficit will remain range-bound. There’s a partial pass-through of higher food and oil prices (with a lag) to consumers.

Pessimistic scenario:?The Russia-Ukraine crisis continues for a prolonged period. Tensions become far and wide with several Important nations getting directly involved in the war. The United States and Europe enter a recession. The rising infection in China spreads around the world, leading to a return of strict mobility restrictions in several economies. A prolonged crisis has second-order implications on financial stability and supply chain disruptions. Government absorbs the larger share of the price rise as inflation spirals up. The RBI goes with a hike or two but retracts later.

Improve supply chain to control inflation:?While there will be a continued fight against inflation, India needs sector-specific targeted efforts to manage supply, and therefore, inflation. For instance, a large part of inflation is due to food prices, and the government must make efforts toward building infrastructure to optimize the food and agribusiness supply chain. Developing market linkages by identifying and connecting farmers with buyers and facilitating contract negotiations between the two could be critical.?

?Incentivize the services sector for job creation:?The government’s focus has rightly been on sectors such as infrastructure, construction, and manufacturing that create jobs for workers across all skills. However, the services sector has huge potential—be it in retail, trade, or information technology. So, while India continues its focus on various schemes such as Product Liked Incentive to promote manufacturing and sunrise sectors, it will have to also focus on the services sector where India is competitive and has a comparative advantage. An effort toward building global in-house centers of the world and adopting agility in doing business could revive the services sector and create employment opportunities.

?Find new sources of revenue:?The government will have to support growth by bolstering spending to cushion the impact of global exigencies and the global economic slowdown. Besides, the government will have to continue the momentum in infrastructure spending to ensure jobs and asset creation. ?While tax revenues have been strong, due to the economic revival and inflation, the government will have to monetize assets so that it can front-load its expenses this year. While the government exceeded its asset monetization target in FY22, it is likely to miss the target for the ongoing fiscal. Going forward, it will have to focus on states with large monetization bases, identify possible assets that can be monetized, and also bring in strategic partnerships with private players to allow private capital to flow into select sectors. Prepare India to recuperate when the global economy recovers:?The government needs to focus on finishing ongoing infrastructure projects and strengthening sectors with strong linkages and multiplier effects. While progress in several infrastructure projects has been good so far, highway networks are yet to gain momentum, and progress in power and energy has been modest. The emphasis should be on improving financial inclusion and technology connectivity beyond Tier-1 cities. Besides, focusing on assisting the micro, small, and medium enterprises sectors could help India achieve all-inclusive growth.

·???????India's economy impairments,?Eurozone inflation falls less than expected, and other economy:Shaping the Future of Financial and Monetary Systems