India’s economic growth is expected to slow down to 6.5 in the fiscal year 2024 from 7 per cent the previous financial year largely due to global economic turmoil and the Russia-Ukraine war that has badly impacted the country’s export, the Economic Survey tabled in Parliament said on Tuesday.
The projection of India’s gross domestic product (GDP) growth is higher than the 6.1 per cent estimate of the International Monetary Fund (IMF). The country logged 7 per cent growth in the current fiscal year (April 2022 to March 2023) and 8.7 per cent in the previous year.
Finance Minister Nirmala Sitharaman tabled the Economic Survey 2022-23 in Parliament a day before she is to present the Union Budget 2023-24. The report is prepared by Chief Economic Adviser V Anantha Nageswaran.
Maintaining that pressure on Indian Rupee will continue and inflation may be on higher side of comfort, the survey said that India’s current account deficit (CAD) was 4.4 per cent of GDP in July-September period, higher than 2.2 per cent a quarter ago and 1.3 per cent a year ago, as rising commodity prices and a weak rupee increased the trade gap.
The survey stated that the inflation projection by RBI at 6.8 per cent for current fiscal (FY23) is above the central bank’s tolerance limit but the pace of price increase is not high enough to deter private consumption or low enough to weaken investment.
According to the survey, the pressure on the Indian rupee could continue due to the tightening of monetary policy. CAD may also remain elevated as imports could remain high due to a strong local economy while exports ease due to weakness in the global economy.
Commenting on inflation projection in the survey, Rumki Majumdar, Economist, Deloitte India, said, “The Government must address the supply bottlenecks to contain inflationary pressures and bring it back within its comfort range in a timely manner. Measures such as spending on infrastructure and logistics may go a long way in bringing down costs and improving competitiveness. More importantly, it will help India move up the value chain over the Amrit Kaal of the next 25 years.”
Majumdar further said that the global slowdown has already been factored into investment decisions in India. “India should now prepare to bounce back when the global economy recovers. Government must pursue policies to cushion the economy to reduce the vagaries of the global business cycle and focus to a greater degree on building infrastructure, creating an industrial base, and encouraging new business formation, Majumdar said.
On the brighter side, the survey said India’s projected growth rate is higher than most of the countries in the world and Goods and Services Tax collection is showing a higher buoyancy than the pre-GST system, auguring well for future resource mobilisation in the economy. Survey 2022-23 presented in Parliament said on Tuesday.
Giving a 5-year analysis of tax collection pre and post-GST, the survey said the taxes which were subsumed in the Goods and Services Tax had a buoyancy of one. However, the buoyancy improved to 1.1 after the GST implementation on July 1, 2017.
“Improved tax collection efficiency was one of the main arguments in favour of GST. The evidence so far suggests that GST is indeed showing a higher buoyancy than the pre-GST system. This augurs well for future resource mobilisation in the economy,” said the Economic Survey.
Tax buoyancy refers to an increase in tax collections in proportion to a rise in national income. A higher buoyancy reflects the increased efficiency of the tax system.
The report listed at least three shocks that have hit the global economy since 2020 starting with the pandemic-induced contraction of the global output, spike in global inflation due to the Russian-Ukraine conflict , and global interest rate hike to curb inflation.
The rate hike by the US Fed drove capital into the US markets causing the US dollar to appreciate against most currencies. This led to the widening of the Current Account Deficits (CAD) and increased inflationary pressures in net importing economies like India.
“The Indian economy, however, appears to have moved on after its encounter with the pandemic, staging a full recovery in FY22 (April 2021 to March 2022) ahead of many nations and positioning itself to ascend to the pre-pandemic growth path in FY23.
“Yet in the current year, India has also faced the challenge of reining in inflation that the European strife accentuated,” the survey said.
However, the challenge of the depreciating rupee, although better performing than most other currencies, persists with the likelihood of further increases in policy rates by the US Fed. The widening of the CAD may also continue as global commodity prices remain elevated and the growth momentum of the Indian economy remains strong, it said.
The survey said there has been an improvement in employment conditions in India due to stronger consumption but a pick-up in private investment is essential to creating more jobs.
“The loss of export stimulus is further possible as the slowing world growth and trade shrinks the global market size in the second half of the current year.”
It indicated that while inflation may not be too worrisome, borrowing costs are likely to remain ‘higher for longer’ as an entrenched inflation may prolong the tightening cycle.
India’s recovery from the pandemic was relatively quick, growth will be supported by solid domestic demand, pick-up in capital investment, the survey said but highlighted the challenge to the rupee with the likelihood of further interest rate hikes by the US Fed.
“The survey projects a baseline GDP growth of 6.5 per cent in real terms in FY24,” the report said. “The actual outcome for real GDP growth will probably lie in the range of 6 per cent to 6.8 per cent, depending on the trajectory of economic and political developments globally.”
CAD may continue to widen as global commodity prices remain elevated and because of strong economic growth momentum. If CAD widens further, the rupee may come under depreciation pressure, it said, adding the overall external situation will remain manageable.
On exports, it said the growth moderated in the second half of the current fiscal year. Slowing world growth, shrinking global trade led to loss of export stimulus in the second half of the current year.
India’s economic growth in FY23 has been principally led by private consumption and capital formation. It has helped generate employment as seen in the declining urban unemployment rate and in the faster net registration in the Employee Provident Fund.
“Still, private capex soon needs to take up the leadership role to put job creation on a fast track,” the survey said.
A slowdown in global growth will likely push down global commodity prices and improve India’s CAD in FY24. “However, a downside risk to the Current Account Balance stems from a swift recovery driven mainly by domestic demand and, to a lesser extent, by exports,” it said. “The CAD needs to be closely monitored as the growth momentum of the current year spills over into the next.”
Growth is expected to be brisk in FY24 as a vigorous credit disbursal and capital investment cycle are expected to unfold in India with the strengthening of the balance sheets of the corporate and banking sectors.
Further support to economic growth will come from the expansion of public digital platforms and path-breaking measures such as PM GatiShakti, the National Logistics Policy, and the Production-Linked Incentive schemes to boost manufacturing output.
“Economy 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,” it said.
Pegging nominal growth at 11 per cent for 2023-24, the survey said the growth in the financial year beginning April 1 will remain strong relative to most global economies, led by sustained private consumption, a pick-up in lending by banks and improved capital spending by corporations.
The optimistic growth forecasts stem from a number of positives like the rebound of private consumption giving a boost to production activity, higher capital expenditure, and near universal vaccination coverage enabling people to spend on contact-based services such as restaurants, hotels, shopping malls and cinemas.
The return of migrant workers to cities to work on construction sites leading to a significant decline in housing market inventory is also a factor for the optimistic growth projection, it said.
The strengthening of the balance sheets of corporates, well-capitalised public sector banks ready to increase the credit supply and the credit growth to micro, small and medium enterprises (MSME) sector have also helped.
