India’s Economic Renaissance

Will India’s economy slow in 2023? The consensus: 2022 was an outlier with GDP growth nudging seven per cent, the highest among major economies. Even the normally conservative World Bank upgraded its forecast for Indian economic growth in 2022 from 6.5 per cent to 6.9 per cent.  But according to most projections, Indian GDP growth in 2023 will sag to six per cent or lower. There are three reasons advanced for this pessimistic outlook.

One, the Russia-Ukraine war will grind on relentlessly, exacerbating trade disruptions. India’s merchandise exports, which account for around 12 per cent of GDP, could be severely affected.

Two, recession in the West will trigger cuts in information technology budgets among large US and European firms, causing a slowdown in India’s bellwether infotech sector.

Three, the fall in rural demand across domestic sectors, especially FMCG, allied with inflation will dampen consumption and lower overall economic growth.

Some of these concerns are valid though overstated. As Sanjeev Sanyal, a member of the Prime Minister’s Economic Advisory Council (PMEAC), notes, India’s economy can plausibly grow at nine per cent a year. He said at a recent G20 conclave: “We can sustain a growth rate of 9 per cent for many years.”

The resilience of the Indian economy was demonstrated throughout 2022 by strong growth despite a spike in the price of crude oil. In February 2021, a year before the Russian invasion of Ukraine, oil was priced at $62 a barrel. On 6 March 2022, with the Russia-Ukraine war intensifying, crude peaked at $129 a barrel before moderating to $76 a barrel in December 2022 as the Chinese economy slowed. India’s annual crude oil import bill, assuming an average price of $80 a barrel, is over $120 billion. While Indian officials have done well to negotiate deep discounts with Russia, the relatively high cost of crude has widened the trade deficit. 

A positive feature in 2022 was the remarkable buoyancy in tax revenue. Goods and Services Tax (GST) collections are averaging over Rs 1.40 lakh crore a month, higher than budgeted estimates. Corporate and personal tax collections are equally robust and could near Rs 10 lakh crore each, a new record and far above budget projections. This will help keep the fiscal deficit well within the 6.4 per cent target set in the 2022-23 Union Budget. The target in the 2023-24 Budget, due on 1 February 2023, is likely to be 5.5-6.0 per cent of nominal GDP. 

Banks meanwhile have had their best year in over a decade. Buffeted for long by Non-Performing Assets (NPAs), banks have cleaned up their balance sheets. India’s largest lender, State Bank of India (SBI) reported its highest ever quarterly net profit of Rs 13,264 crore in July-September 2022. Flush with funds, banks report a smart increase in credit growth to the corporate and retail sectors. This could be a crucial factor in determining India’s economic prospects through 2023.

Private sector investment, which slowed in 2022 due to the after-effects of the Covid pandemic, has revived. Government investment through the PM Gati Shakti Master Plan on infrastructure is also rising. Together private and public investment will fuel economic growth in 2023. That could make some of the forecasts of a sharp dip in India’s GDP growth in 2023 appear unduly pessimistic.

Consumer price inflation fell to 5.9 per cent in November 2022, well within the Reserve Bank of India’s tolerance band of 4-6 per cent.  What does cause legitimate concern however, is the parlous state of Indian startups, an increasingly important part of India’s economy.

India’s startup ecosystem though is likely to recover from the current slump as founders recalibrate costs and refocus on revenue. The surge in spacetech startups has drawn global interest. While pruning costs, several Indian startups are consolidating, with larger firms acquiring smaller rivals. They are also increasing their geographical footprint with acquisitions in the US, Europe, Latin America and the Middle East. If 2023 will be marked by a specific trend, it is the globalisation of Indian startup entrepreneurship.

Infrastructure meanwhile remains the sector to watch in 2023. The Gati Shakti Master Plan is set to turbocharge infra projects across the country. Highways, airports, and sea terminals are seeing significant investment. Between 1947 and 2014, the number of Indian airports remained stagnant at around 72. Since 2014, Indian airports have doubled to over 150, including the recent inauguration of a spanking new airport in Goa.

In parallel fashion, the aviation sector is on the cusp of a boom. Passenger traffic has already crossed pre-pandemic levels at over 4,25,000 passengers per day. Air India’s world-beating order of 500 aircraft for $100 billion may still be in the realm of speculation but it’s clear that the Tata-owned airline means business. It has already set aside $400 million to refurbish the interiors of its fleet.

So will 2023 be as grim as some predict? Unlikely. The flurry of interest rate increases by the US Federal Reserve and European central banks is likely to moderate in 2023, giving the RBI breathing room to ease monetary policy.

Several other global factors will affect India’s economic trajectory in 2023. First, China’s abandonment of its zero-Covid policy will inevitably lead to a surge in infections. For nearly three years, the Chinese have lived in a sanitised bubble. Only one per cent of all Chinese are estimated to have acquired immunity to Covid. Herd immunity, achieved globally, is a long way away in China. Poor vaccination rates and ineffective homegrown vaccines make the elderly especially vulnerable. China’s economy is unlikely to recover before the second half of 2023. That will keep oil prices in check and speed up the flight of Chinese supply chains to Vietnam, Indonesia and India.

The second global factor is how severely the Russia-Ukraine war will impact Western economies which are battling both recession and inflation. If the war prolongs, the growth of Indian exports to the West may moderate though services exports have remained strong despite cuts in digital and cloud budgets at leading US and European firms.

India’s economy in 2023 will be driven by innovation. Watch in particular the growth of green hydrogen, electric vehicles, robotics, spacetech, life sciences and data analytics.