Last three years were challenging for the Indian economy. The COVID-19 pandemic, the Russian invasion of Ukraine and the American central bank’s tight monetary policy impacted the global economy and India, too, was impacted. Covid dealt a heavy blow to India’s large informal economy resulting in massive job and income losses. Fiscal stimulus to revive the economy from the contraction of FY21 and higher expenditure on food security and fertiliser subsidy led to sharp spurt in fiscal deficit. Rising interest rates in US led to capital outflows from India and rupee depreciated by 11 percent in 2022.
Indian economy is strong despite the challenging global environment
As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2023, the economic situation is much better now. India is presently the fastest growing large economy in the world. Gross Domestic Product (GDP) growth in FY2023 is expected to be 7 percent. This is around 3 percent higher than in any other large economy. For the next financial year also, India would be the fastest growing large economy. High GDP growth has led to better-than-expected tax collections. The banking sector is healthy with low non-performing assets. Credit growth at 17 percent is impressive. While our neighbours Sri Lanka, Pakistan and Bangladesh have approached the International Monetary Fund (IMF) for assistance, India is in strong position with adequate foreign exchange reserves of around $ 550 billion. The IMF chief described India as ‘a bright spot in the dark economic horizon.’
While these are silver linings, we cannot ignore some dark clouds looming on the global economic horizon. Global economy will slow down sharply in 2023. IMF projects global growth to decline to 2.1 percent in 2023. The three major engines of global growth – the US, China, and the Euro Zone – are in sharp slowdown. This will impact global trade and India’s exports, too, will be impacted. Consequently, India’s growth in 2023 will be lower in the next year and the tax buoyancy of this year cannot be expected to continue next year. At the same time, the fiscal deficit has to be brought down.
Reduction of fiscal deficit should be top priority
Financial stability is hugely important. India’s fiscal deficit and current account deficit are under control; but continues to be high. 6.4 fiscal deficit and 3.5 percent current account deficit (CAD) are among the highest in developing economies. Since India imports more than 80 percent of our crude oil requirements, we are vulnerable to a sudden spurt in crude prices triggered by some geo-political issue. Worsening CAD can trigger a host of issues like currency depreciation, flight of capital, and imported inflation which might force the Reserve Bank of India to raise interest rates. Therefore, financial stability should be a top priority.
Financial stability will be impacted unless the deficits are brought down. Last budget’s fiscal deficit target of 6.4 percent of GDP will be easily achieved since the tax collections have been buoyant and the nominal GDP growth will be 15.1 percent this financial year. This favourable scenario is unlikely to repeat in the coming year.
Thrust on infrastructure
There is impressive growth in India’s infrastructure. Projects like Bharat Mala, Sagar Mala and Gati Sakthi are transforming the economy’s infrastructure. India’s highway network has doubled in the last 10 years; airline traffic has tripled, and broadband connectivity has multiplied 40 times. The JAM (Jandhan, Aadhaar, Mobile) trinity has created an automated social security network. The thrust of the government on infrastructure will continue in the 2023 budget, too.
Strong rebound in capex
The most promising economic trend now is the sharp rebound in capex. Credit growth is running at an impressive 17 percent year-on-year. Capacity utilization in manufacturing has reached the crucial level of 75 percent at which, normally, capex gets triggered. The PMI (Purchasing Managers’ Index) for manufacturing and services has risen to 57.8 and 58.5 percent respectively in December 2022. The increasing order books of capital goods majors reflect improving prospects for investment.
Banking system is in the pink of health
Fortunately, the banking system is well-equipped to meet the rising credit demand in the economy. The banking system presently is in the pink of health with high capital adequacy and low non-performing assets. The PSU Banks have staged a remarkable turnaround with high asset quality and impressive profitability. The large private sector banks are well capitalised to meet the increasing credit demand.
Despite the challenging global economic environment, the Indian economy is well-placed to retain its fastest-growing large economy status in FY24 also. Corporate profitability is trending up. This outperformance in growth and earnings can lead to outperformance in equity markets, too.
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