Indian Economy Among Fastest Growing Economies in FY23 Amid Global Slowdown; Is it really true?
India is one of the few developing economies in Asia, according to the OECD, with a growth rate of 6.6% for the current financial year, despite the slowdown in the global economy following the a major energy shock caused by the Russia-Ukrainian conflict.
Moreover, it has been said in several investor calls and conferences that India is currently the fastest growing major economy with a growth rate of 7%; therefore, while the rest of the world will sleep during a recession, we will be awake and have plenty of opportunities to exploit. The answer indicates both amusement and pride. Are we really in the perfect situation right now? Are we completely cut off from the rest of the world?
It is not hard to observe that India seems to have lost more than a step or two of its growth velocity when considering how the economy has developed since the global financial crisis of 2008. More specifically, some problems hampered the Indian economy from 2011–12.
The numbers on paper are undisputed, just as our economy grew strongly in 2017-2018 despite demonetization. Moreover, according to the majority of projections, including those of the International Monetary Fund, growth will slow in 2023-2024 but will remain stronger than that of all the other major economies, hovering around 6-6.5%. The Indian growth story will therefore be successful on all levels.
What’s odd about our projected 7% growth in 2022-23 is that our economy will contract in the second half. A sequential slowdown from 13.5% in the first quarter to 6.3% in the second and then to 4.6% each in the third and fourth quarters, according to forecasts by the Reserve Bank of India (RBI), can be observed.
Given that growth in 2021-22 was only 5.4% and 4.6%, respectively, and should provide a statistically weak base for better growth this year, the last two quarters will be troubling. However, this will not happen, so it is important to assess what is wrong with our economy.
The first concern with corporate profitability, which shows the extent to which balance sheets have been impacted by inflation. Second-quarter results show that pent-up demand drove non-financial corporate sales up sharply, as much as 25-30%.
Profits declined almost uniformly, however, and the cause was that companies experienced rapid increases in input costs that they were unable to fully pass on. The situation will persist for the rest of the year due to the fact that inflation will remain high for the next three to four months. Constantly strive to reduce inflation as a solution.
Second, the data demonstrates once again how the pressure on savings this year has been caused by high inflation (and the accompanying charade of higher consumption). According to RBI data, financial savings declined in 2021-2022 Constant consumption came at the expense of savings, leading to high GST revenue and stronger business turnovers.
Once again, inflation is having its effect. Given that banks are dealing with slower deposit growth relative to credit, this is not good news. With the right tax incentives, we need to stimulate savings. We are going to see a significant current account deficit (CAD), defined ex post as the difference between savings and investments, due to the drop in savings. In 2022-2023, this deficit could be around 3 to 3.5% of GDP.
Third, the Western economic slowdown had an effect on exports. The slowdown has had a significant impact on a number of industries including textiles, engineering, jewelry, chemicals, etc. as demand has weakened due to western conditions which have weak growth and high inflation that hurt our exports.
The West will likely experience lower inflation next year, but recession-like conditions will still exist. Exporters should therefore be prepared for a prolonged lull. We must adopt new perspectives and carefully examine the nature and final destination of our exports.
Fourth, a weak West is a wake-up call for the software industry. Layoffs at big tech companies are already happening and outsourcing will be affected. This is important because our current account is supported by both software inflows and remittances.
With growth of 7%, import demand will remain constant, hence our trade deficit would undoubtedly increase. Exports will not pick up until the global economy recovers. Our current account has historically been sustained by annual software revenue of over $120 billion, but a slippage here will be hard to prevent.
Fifth, the cycle of private investment must accelerate, as noted by the Indian Minister of Finance. So far, it seems to be narrowly oriented and confined to a few industries, such as steel and telecommunications. Broader healing will likely take some time.
Sixth, insufficient rural demand has been cited as a concern by many traders of consumer goods, increasing the likelihood that consumption growth is an inflation-backed fiction. This season’s Kharif production for rice and pulses would be reduced, which will have an effect on farmers’ incomes. In light of this, it is important to carefully analyze the signals.
Seventh, the issue of employment is still pending. As to whether or not it is increasing, there is an ongoing discussion. It is terrible news that some new companies, especially startups, have announced layoffs. In the wake of COVID, many businesses have embraced technology for day-to-day tasks. Now that profitability is under pressure, even domestic jobs are at risk. To sustain consumption, we need additional opportunities in the skilled market sector rather than just low-end delivery jobs.
Despite our aspirations to be part of global supply chains, we have found that maintaining our distance for the time being has been beneficial as our main economy continues to have the fastest growth rate in the world. Once the development of India is tied to the fortunes of other nations, this term would no longer be applicable.
Currently, exports serve as a complement to growth while only foreign direct and portfolio investment are sensitive to external forces. In conclusion, we have to be careful when interpreting the label ‘fastest growing economy’. To develop the right set of policies, the government and the RBI still have a lot of work to do. Private investment, on the other hand, will guide the ship.
