India, the world’s fifth-largest economy, is expected to face a slowdown in growth in the next fiscal year, amid rising inflation, higher interest rates, and global uncertainties. According to the latest projections by the International Monetary Fund (IMF), the Asian Development Bank (ADB), and the World Bank, India’s gross domestic product (GDP) will grow at around 6.5% to 6.9% in 2023-24 (FY24), down from an estimated 7% to 8% in 2022-23 (FY23).
The main factors behind the moderation in growth are:
- The ongoing global economic slowdown, which has reduced the demand for India’s exports and affected its external balance. The World Trade Organization (WTO) has halved its growth forecast for global goods trade for this year, citing persistent inflation, higher interest rates, the war in Ukraine, and a strained Chinese property market⁵⁷. The global economy is projected to grow by only 1.7% in 2023 and 2.7% in 2024.
- The tightening of monetary policy by the Reserve Bank of India (RBI) to curb inflation, which has increased the cost of borrowing and dampened investment and consumption. RBI projects headline inflation at 6.8% in FY23, which is outside its target range of 4% +/- 2%. Core inflation, which excludes food and fuel prices, is also expected to remain elevated due to supply-side constraints and rising input costs.
- The elevated oil prices, which have increased India’s import bill and widened its current account deficit. India is the world’s third-largest oil importer and depends on imports for about 85% of its oil needs. Oil prices have surged by more than 50% since the start of 2022, reaching over $100 per barrel in October 2023[^10^].
- The domestic challenges, such as the slow pace of vaccination, the risk of new COVID-19 variants, the weak financial sector, the low tax revenue, and the social unrest. India has vaccinated about 70% of its eligible population with at least one dose, but only about 40% with two doses as of October 2023. The banking sector is still grappling with high non-performing assets and low credit growth. The fiscal deficit is expected to remain high at around 6% of GDP in FY23 and FY24. The recent farmers’ protests and communal violence have also raised concerns about social stability.
However, there are also some positive factors that could support India’s growth in the medium term:
- The strong infrastructure push by the government under the Prime Minister’s Gati Shakti (National Master Plan for Multimodal Connectivity) initiative, which aims to invest $1.5 trillion over five years to improve transport infrastructure, logistics, and industrial corridors⁴. This could boost productivity, competitiveness, and job creation in the economy.
- The recovery in private consumption and private investment, driven by improving labor market conditions, consumer confidence, and corporate balance sheets. Private consumption as a percentage of GDP stood at 58.4% in Q2 of FY23, the highest among the second quarters of all the years since 2013-14. Private investment is expected to pick up in FY24 as banks lend more to businesses after resolving their bad loans and corporates deleverage their debt.
- The surge in growth of exports in FY22 and the first half of FY23, which induced a shift in the production processes from mild acceleration to cruise mode. India’s exports grew by 25.8% year-on-year in FY22 and by 21.4% in April-September FY23, outperforming most of its peers. The sectors that contributed to this export growth include engineering goods, chemicals, pharmaceuticals, textiles, and gems and jewelry.
- The reforms undertaken by the government to enhance agricultural productivity, such as setting up digital services for crop planning and support for agriculture startups. Agriculture accounts for about 15% of India’s GDP and employs more than half of its workforce. Increasing farm incomes and rural demand could have a positive multiplier effect on the economy.
In conclusion, India’s economy is likely to face a challenging year ahead as it copes with both external and internal headwinds. However, it also has some strengths that could help it overcome these difficulties and achieve a sustainable growth path in the long run. India needs to continue its reform agenda, maintain macroeconomic stability, strengthen its health system, and foster social harmony to realize its full potential as a major emerging market economy.
source: Conversation with Bing