India is recording relatively rapid growth in the midst of global economic turmoil. This is not to deny that the country faces its own set of challenges. One big challenge is that post-pandemic consumption growth has not been broad-based.
While the urban area has been showing strong pent-up demand, specifically coming from higher-income households, rural demand remains relatively muted. This year’s poor monsoon rainfall has further jeopardized a rural consumption recovery.
Overall, kharif season foodgrain production is likely to be lower by 4.7% year-on-year (as per first advance estimate), with lower production estimated for rice, pulses, coarse cereals and oilseeds. Inflation in some basic food items, like cereal and pulses, is already quite high.
Weak agriculture production could further exacerbate inflation in these items. This in turn will have adverse implications for a broad-based consumption recovery.
The other major concern is around a pick-up in private investment. So far, the investment push in the economy has been mainly led by the government. The Centre’s and aggregate states’ capital expenditure (capex) have grown by a staggering 49% and 43% year-on-year respectively in the first half of 2023-24.
However, the subsidy burden on the government has been increasing. There has been a higher outgo towards fertilizer and petroleum subsidies, even though the extension of the free food scheme for the poor will not have any meaningful impact on the food subsidy bill for 2023-24. The total subsidy bill in the year’s first half stood at ₹2.1 trillion, which is the highest half-yearly amount seen in the past four years and 3.8% higher than the already high subsidy burden in the corresponding period last year.
Going forward, an increased subsidy burden could put pressure on the government’s capex plan as it tries to achieve its fiscal deficit target for 2023-24. With capacity utilization rising (74% as of the year’s first quarter), private investment is expected to pick up. Corporate and bank balance sheets are also in good enough shape to support a firm capex recovery.
Our analysis shows that for India Inc (a sample of 1,300 non-financial listed firms), capex in 2022-23 improved to reach 3.3% above the pre-covid level. A capex recovery is being seen in sectors like power, steel, cement and renewables. However, a sharp pick-up in private sector capex remains elusive.
Worryingly, the data shows that investment projects announced by the private sector have been going down in the last two quarters. After touching a high of ₹13.4 trillion in the fourth quarter of 2022-23, new projects announced reduced to ₹6.6 trillion in the following quarter and then to ₹1.2 trillion in the second quarter of 2023-24 (as per the Centre for Monitoring Indian Economy).
Investment projects announced give an indication of the intent to invest and hence is an important indicator to track. The private sector’s lower intent to invest could be related to election-related policy uncertainties and is worrisome.
Add to domestic woes, uncertainties on the global front have got aggravated. Geo-political tensions have worsened with the Israel-Gaza War, even while the Russia-Ukraine conflict lingers. So far, there has not been a severe impact of the war in West Asia on global crude oil prices.
However, if the war spreads further and turns into a wider conflagration that involves Iran (which accounts for 3.8% of global crude oil production), it could result in a crude oil price spike, with serious implications for global growth and inflation.
The International Monetary Fund has maintained its global gross domestic product (GDP) growth projection at 3% for 2023, with the US economic growth outlook improving marginally. However, the weak outlook for China and the EU region is a matter of concern.
Amid weak global demand, India’s merchandise exports remain poor, having contracted by 8.7%, year-on-year, in the current fiscal year so far. India’s services sector exports have remained robust, though, despite a global slowdown, growing by 5% in 2023-24 so far.
The external sector continues to record monthly exports in the range of $25-30 billion this fiscal year, compared to average monthly exports of $17 billion in 2018-19 (a pre-covid year). But the rate of growth in service exports has started coming down in the past few months.
Globally, interest rates have broadly peaked, and some emerging economies have already started cutting policy rates of interest. But with inflation concerns still lingering, interest rates staying ‘higher for longer’ appears to be the new mantra for most major central banks around the world. We need to remain cautious of the impact of this on global growth and financial sector stability.
Even as we face these risks, many high-frequency macro indicators in India are showing improvement. For instance, the Index of Industrial Production jumped by 10.3% in August 2023, with marked improvement in the consumer goods and infrastructure sectors.
Monthly GST collections surged to ₹1.72 trillion in October, the second highest mop-up since its inception. Readings on both the manufacturing and services Purchasing Manager Index have slowed, but they remain comfortably in expansion territory.
Overall, it’s remarkable that India will manage to record above 6% GDP growth this fiscal year in the face of growing headwinds and uncertainties.