Painting an exuberant picture of the Indian economy’s prospects thanks to “New Age” reforms undertaken since 2014, the Economic Survey tabled by Finance Minister Nirmala Sitharaman in Parliament on Tuesday asserted that not only are the pandemic-induced blues over, but the outlook for the years ahead is also rosier than in the pre-COVID years.
Though global uncertainties are rife and the world economy is slowing, the Survey exuded confidence that India’s GDP would grow 6.5% in 2023-24, after an estimated 7% this year, “supported by solid domestic demand and a pickup in capital investment”.
“The Indian economy in 2022-23 has nearly ‘recouped’ what was lost, ‘renewed’ what had paused, and ‘re-energised’ what had slowed during the pandemic and since the conflict in Europe,” the Survey averred.
Uncertainty remains: CEA
The final growth outcome for 2023-24 could be in the range of 6% to 6.8%, depending on the trajectory of global economic and political developments. “Some of you may think the range is asymmetric in nature, but that is deliberate because there is still uncertainty. We have many known unknowns and unknown unknowns,” remarked Chief Economic Advisor (CEA) V. Anantha Nageswaran.
While the Survey expects inflation -- a bugbear for the economy throughout this year -- to be “well-behaved” in 2023-24, the CEA acknowledged there were upside risks to commodity prices from external factors such as China rapidly reopening its economic activity. The Central bank’s estimate of 6.8% retail inflation for 2022-23 is outside its target range, but “at the same time, it is not high enough to deter private consumption and also not so low as to weaken the inducement to invest,” the Survey said.
“We expect [that] if the global economy slows down as IMF and many people project, then commodity prices should retreat on the back of the monetary tightening… As of now, the United States economy looks set to avoid a full-fledged formal recession. And therefore, this January, already we have seen crude oil prices and industrial metal prices are higher than they were at the end of December,” the CEA noted.
Vigilant on inflation, deficit
Monetary and fiscal authorities will need to stay proactive and vigilant on inflation as well as the worsening current account deficit front, the Survey noted, flagging multiple risks for the latter, including slowing exports, a rising import bill due to strong domestic demand and commodity prices still being above pre-conflict levels.
“Should the current account deficit widen further, the currency may come under depreciation pressure,” it said. Entrenched inflation may prolong the monetary tightening cycle and keep borrowing costs “higher for longer”, the Survey admitted, but even a low global growth scenario will present two silver linings for India – low oil prices and a better current account deficit situation.
Lag in growth
“Noting that ‘successive shocks’ over recent years, such as the ILFS collapse, the COVID-19 pandemic and the supply chain shocks in 2022, have led to a lag in the growth effects of sweeping reforms across multiple dimensions carried out between 2014 and 2022,” the CEA said. He compared this to the lag effects seen on growth post-2003, from reforms carried out by the Atal Bihari Vajpayee-led government between 1998 and 2002.
Stressing that India is prepared to “grow at its potential once the one-off shocks recede’”, the Survey said that the financial cycle was poised to turn upward after a long period of balance sheet repair in the financial and corporate sector.
Over the medium term, the Survey suggests that the growth rate could be around 6.5%, with a potential to go up to 7% and 8%, subject to macroeconomic stabilisation, restoring fiscal consolidation and continuing the thrust on infrastructure building as well as reforms such as encouraging women’s employment and dismantling what Mr. Nageswaran termed ‘LIC (License, Inspection and Compliance)’ regimes across Central, State and local government levels.
“…Even without export growth kicking in, we can strive for and be able to achieve 8% growth, if on top of the reforms already done, several other additional dimensions are addressed as well. But the reason we shouldn’t be looking at 8% or 9% growth at this point is the difference from the first decade of the millennium, when the global economy was booming. Now it is not, in spite of the aggressive unconventional monetary easing in the developed world,” the CEA pointed out.
‘Fleeting impact of demonetisation’
Responding to a query on whether the reforms and “successive shocks” to the economy referred to by the Survey, included the impact of demonetisation on the informal sector in November 2016, Mr. Nageswaran said that there were academic studies that showed that the impact of the note ban, if any, was ‘fleeting’.
“…And it [demonetisation] had a positive contribution in terms of hastening the transition to the digital economy and in terms of discouraging black money creation. To the large extent that India today has embraced digitalization, the origins of that could be traced to demonetisation,” he said.
“The Survey indicates that fiscal space next year will be squeezed, relative to 2022-23, and implies that a lowering of the GDP growth rate is on the cards from the 7% expected this year. It is difficult to then restore a strong path of fiscal consolidation while continuing to maintain support for infrastructure expansion,” said D.K. Srivastava, chief policy advisor at EY India. “The Survey also signals that vulnerabilities to India’s growth mainly stem from external factors, while domestic drivers remain strong,” he noted.
While the Survey asserted that there were “early signs of a rebound in private sector investments in recent months”, Mr. Nageswaran said that fiscal policy has supported growth by ramping up public investments, adding that the government would continue to do so because India needs more infrastructure investments. However, he stressed that “the time has probably come for the private sector to take on the baton of contributing to economic growth”.