Indian economy to grow 6-6.8% next fiscal year: Eco Survey
New Delhi: India’s economy is projected to slow to 6-6.8 per cent in the fiscal year starting April – still remaining the fastest growing major economy in the world – as extraordinary challenges facing the globe will likely hurt exports, the Economic Survey 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) and compares with the survey’s estimated 7 per cent expansion in the current fiscal year (April 2022 to March 2023) and 8.7 per cent in the previous year.
The survey that details the state of the economy was tabled in Parliament by Finance Minister Nirmala Sitharaman a day before she presents Union Budget 2023-24.
“At least three shocks have hit the global economy since 2020,” the report, prepared by Chief Economic Adviser V Anantha Nageswaran, said.
Starting with the pandemic-induced contraction of the global output, the Russian-Ukraine conflict last year led to a worldwide surge in inflation. And then, central banks across economies led by the US Federal Reserve responded with synchronised policy rate hikes 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 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.
India’s 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 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 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.
Notably, the survey recommended “entirely” dismantling the licensing, inspection and compliance regime, and a host of other reforms to accelerate economic growth to sustained higher levels.
The Survey tabled in Parliament by Finance Minister Nirmala Sitharaman said the reforms undertaken before 2014 primarily catered to product and capital market space.
“They were necessary and continued post-2014 as well,” it said.
The government, however, imparted a new dimension to these reforms in the last eight years.
“With an underlying emphasis on enhancing the ease of living and doing business and improving economic efficiency, the reforms are well placed to lift the economy’s potential growth,” it said while listing out reforms undertaken by the Modi government since 2014.
The Survey has been authored by a team lead by Chief Economic Adviser V Anantha Nageswaran.
It said that while the new age reforms undertaken over the last eight years form the foundation of a resilient, partnership-based governance ecosystem and restore the ability of the economy to grow healthily, further reforms are needed to ensure that economic growth can both accelerate and be sustained at higher levels, to deliver a better quality of life.
“The deregulation and simplification of compliances should continue to dismantle the licensing, inspection and compliance regime entirely,” it said.
Further, state governments have to address power sector issues, and the financial viability concerns of the Discoms have to be addressed.
Impetus must be given to education and skilling to match the requirements of modern industry and technologies, deal with twenty-first-century challenges such as climate change and energy transition, and make the most of India’s demographic dividend.
“Initiatives to sensitise the population towards a healthy lifestyle should be continued. Strategies to arrest and reverse the rising obesity levels should be adopted,” the survey added.
Other reforms suggested, include long-range plans to secure the necessary metals and minerals required for energy transition and diversification, and public sector asset monetisation.
It also underlined reforms to reduce the compliance burden on MSMEs, enhance their access to finance and working capital and equip them with skills, knowledge and attitude to grow their businesses responsibly must continue.
If the other reforms are pursued in the coming years, “India’s potential GDP growth can rise to 7-8 per cent per annum in the medium term”, said the survey.
The 414-page document notes that the years of structural reforms had prepared the Indian economy to contribute to global growth and also benefit from it.
While the global growth averaged 4.8 per cent during 2003-2008, the Indian economy grew at more than 8 per cent on average.
It said the economic growth during the period was supported by strong capital inflows, which indicated favourable domestic and external factors.
Some of these included sustained momentum in domestic economic activity, better corporate performance, a conducive investment climate, positive sentiments for India as a preferred investment destination, and encouraging global liquidity conditions/ interest rates.
“This combination of structural economic reforms with their lagged effect on economic growth has parallels to what is unfolding in the Indian economy presently,” it said.
The survey said 2014-2022 is an important period in the economic history of India. The economy underwent a gamut of wide-ranging structural and governance reforms that strengthened the economy’s fundamentals by enhancing its overall efficiency.
With an underlying emphasis on improving the ease of living and doing business, the reforms were based on the broad principles of creating public goods, adopting trust-based governance, co-partnering with the private sector for development, and improving agricultural productivity.
Under normal circumstances, reforms of such scale and relevance would have accelerated economic growth, it added.
Meanwhile, amid expectations of tax relief for middle class in the Budget, Economic Survey suggested that the government should follow the path of fiscal prudence as it will benefit all sections of society by keeping interest rates low.
The Survey, authored by a team led by Chief Economic Advisor V Anantha Nageswaran, argued that fiscal discipline will ensure significant fiscal space for policy action in uncertain times.
“As India’s economic recovery advances, amidst the continuing global uncertainties and risks, the fiscal glide path illuminates the path for fiscal policy. That will ensure more significant fiscal space for policy action in uncertain times.
“Further, in reality, fiscal discipline translates into a fiscal stimulus for all sections of the economy through lower interest rates,” the Economic Survey 2022-23 said.
The suggestion comes on the backdrop of increasing expectations of the middle class that the Budget, to be unveiled on February 1, will have some tax sops to tide over the impact of inflation.
The Survey further said that fiscal prudence will ensure lower interest rates for educational loans, housing loans, car loans and business loans, thereby putting more money in the hands of people.
A higher fiscal deficit translates to larger government borrowings, which in turn push interest rates.
In the past couple of years, the government has been pushing capital expenditure to drive economic growth.
The fiscal deficit, the amount the government borrows from the market to meet its expenses, has been pegged at Rs 16.61 lakh crore or 6.4 per cent of GDP in the current fiscal. This is lower than 6.71 per cent in the last fiscal.
The government has set a consolidation target under which it aims to reach a fiscal deficit level below 4.5 per cent by 2025-26.
“The capex-led growth strategy will ensure sustainable debt levels in the medium-term,” the Survey said.
The Survey said a high fiscal-deficit-to-GDP ratio witnessed in the aftermath of the pandemic is a concern for countries worldwide and the solution to the increased fiscal deficit and debt-to-GDP ratios lies in persistently high growth for a few years.
It said that there is no need for ‘undue alarm’ on the fiscal front with India’s nominal GDP growth expected to get back to its trend path and fiscal parameters showing improvement.
The survey said fiscal consolidation will be achieved in the medium-term on the back of sustained and moderate economic growth rate.
The Economic Survey 2022-23 has projected nominal GDP growth at 11 per cent in the next fiscal and real GDP growth of 6-6.8 per cent.
India will become a USD 3.5 trillion economy by March 2023, with GDP growth rate of 7 per cent in current fiscal.
Press Trust of India
