Context: India’s economy in 2023 is projected to be clouded by the war, and elevated food & fuel prices.
Prospects for Indian Economy in 2023 Highlights
- 2022 Performance: 2022 year witnessed the highest global inflation in 50 years, the most aggressive monetary tightening cycle in nearly 40 years, the strongest US dollar in 20 years, and the weakest Chinese growth in over 45 years.
- According to the IMF, the world economy has suffered numerous setbacks, such as the war in Ukraine, which has increased the cost of food and energy, COVID-19 and its impact on economic systems, as well as escalating prices and increasing rates of interest.
- IMF projection suggest that global growth is projected to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023 — the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the pandemic.
- According to the IMF, Global inflation is forecast to decline from 8.8% in 2022 to 6.5% in 2023 to 4.1% by 2024.
- Indian economy is yet to recover a lot of ground lost due to Covid-19.
- India entered the pandemic after eight successive quarters of declining growth and a high inflation trajectory.
- Reserve Bank of India in State of the Economy update, stated that the balance of risks is increasingly tilted towards “a darkening global outlook”, and emerging market economies (EMEs) appears to be “more vulnerable”.
Concerns for Indian Economy
- External environment: The Ukraine war is threatening an energy-linked downturn in the European Union, India’s biggest export market.
- Sign of Global Slowdown: The World Bank has slashed its growth forecast for China to 2.7% this year from the 4.3% estimated in June, and has nearly halved the projection of 8.1% next year.
- Threat to Globalisation: 2023 will see higher protectionism worldwide, greater fervour for de-globalisation, and more economic balkanisation: a worrying prospect for countries such as India that are keen to tap exports as a driver for growth.
- Protectionist mood around the world is a major dampener for emerging economies.
- Poor Manufacturing in India: Factory output, as measured by the Index of Industrial Production (IIP), slumped to a 26-month low in the festive month of October.
- Core sector growth for October was just 0.1%, the lowest for 20 months.
- Capacity utilisation: It is the ratio of actual output to the potential output that can be produced under normal conditions.
- It 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
- Distress among the Micro, Small and Medium Enterprises (MSME) firms: One in every six loans disbursed under the Emergency Credit Line Guarantee Scheme has turned bad in just 27 months, with the defaults mainly in the lower end of the loan bands (up to Rs 20 lakh).
- MSMEs employ a sizable section of the labour force, and their continuing financial stress points to the distress in the labour market, and a cascading impact on demand recovery.
- Capital expenditure: Capital expenditure of the states has remained weak. Investments by states typically tend to have a higher multiplier effect.
- Dependency on imported energy: At 4% of the country’s GDP, energy import is a challenge that shows up on the balance of payments side. A current account deficit of well over 3% is projected for FY23.
- Rural distress: Rural wages contracted for the ninth consecutive month in September, pointing to continuing distress in the hinterland.
Positive Outlook for India in 2023
- Positive near-term growth outlook for the Indian economy: In November, equity markets touched new highs, buoyed by a rebound in portfolio flows to India.
- Headline consumer-level inflation moderated by nearly a percentage point to 5.9% in November, driven by a fall in vegetables prices.
- Twin Balance Sheet Problem: Corporates having high levels of debt and banks saddled with bad loans on their books — looks to be on the mend.
- Corporate debt-to-GDP at its lowest in nearly a decade and a half, and bank books have shed much of the legacy bad loans.
- Upturn in Capex Cycle: Decreasing input cost pressures, increasing corporate sales, and a turn-up in investments in fixed assets seem to signal an upturn in the capex cycle.
- It could potentially contribute to a reboot of India’s growth momentum.
- The PLI scheme is offering an impetus to manufacturing.
- Fresh investments are expected in renewables, electric vehicles, and battery tech.
- Bank credit has been growing in double digits for eight months now, reflecting in part an uptick in investment appetite.
- The China-plus-one strategy being adopted by most multinational companies could be an opportunity, given that Beijing is vacating large amounts of space in low-skilled, unskilled labour intensive manufacturing such as textiles, shoes, leather, and ceramics, and India has a chance to fill part of this vacuum.
- Term-lending to non-corporates is seeing a growth: A positive sign that seems to imply that smaller firms may be seeking funds beyond their immediate working capital needs.
- Robust collections in both direct taxes and GST, reflecting sustained recovery of the corporate sector.
- States have shown some decline in their consolidated deficits and net market borrowings.
- Agriculture driver for overall GDP growth, with the rabi outlook showing good prospects for wheat production with higher support prices, adequate reservoir levels, and climatic factors supporting higher acreage, according to the RBI.
Prospects for Indian Economy in 2023 Conclusion
- World slowdown and tightening of finance situations will impact India’s economy by way of numerous channels. The crucial facet will be how India navigates its approach forward.
- This consists of how cautiously commerce pacts with key economies are evaluated. India’s G20 presidency gives a particular alternative to affect the worldwide panorama at a turbulent juncture.