As is the practice, the Economic survey presented a picture of how the economy had performed in the year 2022-23 as well as the projections for GDP and other macro parameters for FY23 and FY24. Here are the key takeaways from the Economic Survey 2022-23 and what it could mean for the Union Budget announcement for FY2023-24.
GDP growth – a year of recovery and of optimism
The year 2022-23 saw macroeconomic growth from the lows of COVID-19 and also from the pressures of the Russia Ukraine war. For FY23, the Indian economy is expected to grow 7.0% as stated in the first estimate of GDP growth. For FY24, the GDP growth is likely to be in the range of 6.0% to 6.8% and with a bias towards 6.5% growth. While the retail inflation came back under the 6% range, the economy got a boost from robust tax revenues and also from the government focusing more on capex than on revenue spending. Credit growth for the MSME sector stood at 30.6% in the first half.
Let us focus on the outlook for medium to long term growth of the Indian economy. Indian growth had lagged in the period from 2014 to 2020, but that was more due to the balance sheet stress. However, reforms with focus on ease of doing business, bankruptcy code and product linked incentives; the base was laid for solid long term growth. With bank balance sheets much healthier and PSU banks on the ascendant, credit cycle has again picked up. The lag effect of the formalization of the economy, introduction of GST and digital ecosystem is also likely to be felt on economic growth in the coming years.
Fiscal deficit – Managing the revenue side
After touching a high of 9.5% fiscal deficit in FY21 and 6.9% in FY22, the fiscal deficit appears to be on target for 6.4% for FY23. Robust revenues also gives the government the leeway to reduce fiscal deficit targets in the future to give it a semblance of FRBM discipline. For H1FY23, the revenues grew 15.5% yoy, which is much higher than the long term averages. GST on a monthly basis have stabilized around the Rs1.50 trillion mark. The enhanced income levels have also resulted in total direct collections getting a boost. In fact, the estimate for FY23 is that the total tax revenues could be nearly Rs4 trillion higher than the original budgetary estimates. GST growth at 24.8% yoy over the previous year, is the best annual performance since GST was first introduced in July 2017.
Fiscal Deficit – Managing the spending side
For the year FY23, the real story is not just the amount of spending but the quality of spend. For instance, there has been a clear shift towards capital spending over revenue spending. India’s capital spending as a share of GDP was 1.7% in the period FY09 to FY20 but has spiked to 2.5% in FY22 and is expected to have come in still higher in FY23. The emphasis of capital spending has been on roads, highways, railways, housing and urban affairs as well as supporting state level capex through interest free loans. Normally, a spike in capex has long term positive externalities and the impact is likely to be felt in the coming years.
Inflation and monetary policy
In the last one year, the global approach has been to control the rampant inflation through monetary tightening. Inflation got to near double digits across the US, UK, EU and even Indian CPI inflation had got close to 8% before tapering to more acceptable levels. Hence the RBI could not afford to be behind the curve on monetary tightening. In the year 2022, while the US Fed tightened rates by 425 basis points, the RBI tightened by 225 basis points. Controlling inflation was a monetary plus fiscal effort. On the one hand, the monetary tightening helped curb spending and inflation. On the other hand, the government also cut import duties on critical inputs, to check the supply side inflation.
One outcome of this war against inflation has been that the retail inflation has come inside the RBI outer tolerance level of 6%. However, unlike in the US, the inflation control and tightening have happened amidst a rise in the housing price index (HPI). The year 2022-23 also some substantive improvements in other aspects of banking like the asset quality and capital adequacy. Gross NPAs of the scheduled commercial banks overall fell to 5.0% while the capital risk weighted assets ratio (CRAR) remained healthy at 16% overall for the banking system. But more encouraging has been the double digit growth in non-food credit.
Soft side: social infrastructure and environment
In a complex world the progress cannot be judged purely by hard numbers but soft data too. During 2022-23, there was significant spending on the social sector by the government. It is likely to stabilize at 2.2% of GDP in FY23 and continue into FY24. The Jan Dhan program over the years has brought crores of marginalized families into the banking mainstream and, combined with Aadhar, it has also ensured welfare delivery without leakages. While the gross enrolments in primary schools has improved, out of pocket spending on health has come down drastically. With 220 crore COVID vaccines administered, India remains the biggest example of execution amidst constraints.
Soft power discussion would be incomplete without talking about the environment or the green initiatives. India has made a net zero pledge by 2070. But the milestones are a lot more encouraging. The target of 40% installed power capacity from non-fossil fuels, a full 8 years ahead of schedule. Emission rates are likely to come down by another 30% by FY30, marking the best progress by any emerging market economy. India has successfully launched its green bond program in FY23, railing over $1 billion the first tranche. The National Green Hydrogen Mission has pledged to make energy independent by 2047 with green hydrogen capacity of 5 MMT by the year 2030. Solar power capacity already stands at 61.6 GW with renewables investment at $78 billion over last 7 years.
Agriculture, food management and industry
The current government has focused on boosting food grain output and farm incomes. The result has been steady agriculture growth of 3.5% to 4% on an average. Successive budgets have focused on remunerative MSP for crops, alternate income streams for farmers and private investment in agriculture. Institutional credit to agriculture stood at Rs18.6 trillion in FY22 while private investment was 9.3% of incremental agri spending. Food grain output touched record levels of 315.70 MT for FY22, although FY23 could be slightly lower due to selective drought conditions. In one of the largest programs, more than 81.4 crore persons benefited from the free foodgrain program, under the National Food Security Act.
Gross value added of industrial sector in H1FY23 stood at 3.7%; a full 90 bps higher than the average of the first half over last 10 years. Industrial growth triggers came largely from a surge in private final consumption and from inventory accumulation by business. PMI manufacturing has expanded for 18 months since July 2021. During the year, India emerged as the second largest manufacturer of mobile phones in the world as FDI into pharma grew 4-fold in last 3 years. Above all, the production linked incentive (PLI) scheme has covered 14 categories with capex estimated at Rs4 trillion in next five years. While investments under PLI were Rs47,500 crore, it is expected to result in output of Rs3.85 trillion and 3 lakh new jobs created. As of early 2023, nearly 39,000 compliances have been reduced.
Services sector and global trade
Services sector is getting back its mojo, growing 8.4% in FY22 and likely to grow at 9.1% in FY23. India’s services exports played a major role in keeping the current account deficit under check in the current year. While credit to the services grew by 16%, FDI flows into services sector were $7.1 billion in FY22. The rebound in services has been largely driven by a sharp recovery in the contract intensive sectors like hotels, tourism, trade and transport.
On the global trade front, merchandise exports stood at $333 billion for 9 months of FY23, even as the export markets expanded in the Middle East and Latin America. A slew of 14 free trade area (FTA) agreements have been signed, with UK FTA likely by end of this year. Inward remittances at $100 billion made India the largest recipient in the world. While the RBI intervention to defence the rupee led to RBI reserves falling by over $100 billion, it has now bounced back to $563 billion as of December 2022; or 9.3 months import cover.
Infrastructure: physical and digital
Let us talk about physical infrastructure first. Over 56 projects with project cost of Rs57,870 crore were part of public-private partnerships. A total of 89,151 projects have been identified for priority treatment under the National Infrastructure Pipeline (NIP) worth more than Rs141 trillion. During the year over 1,009 projects worth Rs5.50 trillion were completed. NIP projects have fast track approvals and clearances. Government has also planned Rs9 trillion national monetization plan (NMP) with 10% achieved in FY23. There have been steps to make Indian logistics globally competitive. This will include doubling of port capacity in 8 years.
Finally, let us focus on digital infrastructure. UPI (unified payments interface) based transactions grew 121% between FY19 and FY22. More than 98% of telephone subscribers in India are connected wirelessly with tele-density of 84.8%. In the last 6 years there has been a 200% increase in rural internet subscriptions.
To sum it up, the macro progress of the Indian economy has been impressive despite the massive challenges in the last few years like the pandemic, the economic contraction, the Russia Ukraine war, runaway inflation and the growth impact of monetary tightness.
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The US Federal committee's meeting will conclude on March 16, 2022.
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