Recap 2023, Marching into 2024 (Macroeconomic Story)

27 Dec 2023 , 10:33 AM

INDIAN ECONOMY IS BIG, AND IT MATTERS

The India story of the last few years was best captured by the World Bank in a report in early 2022. According to World Bank, “At a projected 8.2% growth rate, India is the fastest growing trillion-dollar economy in 2022. Over the past decade, India’s integration into the global economy has been accompanied by economic growth and has emerged as a global player.” In 2022, India was already $3.29 trillion and estimated to reach touch $5 trillion GDP by 2027. Continuing with its description, the World Bank said, “In comparison to other major economies, the gross value added by agriculture and allied sectors is still high in India at around 18.8%. However, the bigger consumption explosion will come when India’s per capita income transitions from $2,342 to $3,350 by the year 2027.” Incidentally, India is projected to be the fastest growing trillion dollar economy in 2023 and 2024 also.

HINDU RATE OF GROWTH TO HIGH GROWTH 

Indian economy has surely come a long way. From being stuck in the Hindu rate of growth, through the 1970s and 1980s, it transitioned into a free economy in 1991 and has not looked back since. Today, India has several macro advantages like demographic dividends, a focus on capex, robust services economy, and reform oriented government. India is already the fifth largest economy in the world by GDP (after the US, China, Japan, and Germany) and is poised to get past Germany and Japan by end of this decade. It is in this background that we look back at why 2023 was a critical year. It is not just about the end of rate hikes, but also about how the macroeconomic policy has stood up to ensure the delicate balance between growth, price stability and the competitiveness of Indian economy.

HOW INFLATION PANNED OUT IN YEAR 2023

 First a quick background. Inflation had peaked in mid-2022. This was a direct outcome of the aftermath of the COVID pandemic. As economies infused billions of dollars in helicopter money into their economies, the demand surged and supply struggled to keep pace. This resulted in supply chain constraints, largely because China was at the centre of the global supply chain. Here is how inflation panned out for India in 2023.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Jan-23	5.94%	6.10%	6.52%
Feb-23	5.95%	6.10%	6.44%
Mar-23	4.79%	5.95%	5.66%
Apr-23	3.84%	5.20%	4.70%
May-23	2.91%	5.02%	4.25%
Jun-23	4.49%	5.10%	4.81%
Jul-23	11.51%	4.90%	7.44%
Aug-23	9.94%	4.80%	6.83%
Sep-23	6.56%	4.50%	5.02%
Oct-23	6.61%	4.20%	4.87%
Nov-23	8.70%	4.10%	5.55%

Data Source: MOSPI & Ministry of Finance Estimates

Headline inflation can be simplistic, but it does not give the full picture. December inflation data will only be available by the middle of January 2024, so we will take a look at the data for the first 11 months. Here are some key takeaways from the inflation story in 2023.

• If you exclude the spike in inflation in the months of July and August 2023, the average inflation has been in the range of 5.0%  to 5.5%. That is not too bad if you consider that it is under the 6% outer tolerance limit of the RBI and moving towards the eventual target of 4%. It shows that barring that interim spike, price stability was maintained.

   

• The brief interlude of high inflation in July and August 2023 was largely driven by a spike in food inflation. India had a below-average monsoon in 2023 and this was followed by erratic bouts of floods and drought in various parts of India. Not only the Kharif was below target, even the arrival of Kharif to Mandis was delayed due to supply chain constraints and Rabi sowing is delayed. Food prices remain the key irritant.

   

• However, the big news on the inflation front was how core inflation fell by a full 200 bps during the year from 6.10% to 4.10%. Core inflation is the residual inflation after food and fuel are removed. Core inflation is structural in  nature and much tougher to handle. While food and fuel inflation can be handled with policy intervention, core inflation cannot. That is what makes this sharp fall in core inflation all the more significant.

The RBI stopped hiking rates in February 2023 and has held repo rates at 6.5% since then. However, the lag effect of the 250 bps rate hike has been good enough to keep inflation in check. At a macro level, the positive takeaway for 2023 was that inflation has been tamed if not full controlled. The sharp fall in core inflation in 2023, probably, says it all.

HOW IIP GROWTH AND CORE SECTOR GROWTH PANNED OUT IN 2023

Core sector growth is the set of 8 infrastructure sectors reported each month with a lag. IIP is specifically focused on industrial growth and is largely on manufacturing. However, core sector has a 40.27% weightage in the IIP basket, so the core sector acts as the lead indicator for IIP growth. The table below captures how these macro variables performed in 2023.

Month	IIP Growth (%)	Core Sector Growth (%)
Dec-22	5.12%	8.28
Jan-23	5.81%	9.67
Feb-23	6.01%	7.38
Mar-23	1.95%	4.24
Apr-23	4.61%	4.57
May-23	5.66%	5.23
Jun-23	4.05%	8.37
Jul-23	6.18%	8.55
Aug-23	10.34%	12.55
Sep-23	6.20%	9.20
Oct-23	11.74%	12.07

Data Source: MOSPI

Since IIP and core sector are normally reported by the MOSPI with a lag of one month, we have included an additional month data for 2022 also to give a better perspective. Here are some of the takeaways.

• If you look at core sector data for the last 11 months, growth has been above 8% in seven out of the last eleven months. This is an outcome of the government going aggressive on capex in its budget. In the latest budget, the capex outlay was increased by 50% yoy. That is evident in the frenetic growth we see in some of the sub-sectors of core sector like electricity, coal mining, cement, and steel. Hydrocarbons have an inordinately high weightage in the core sector; and if you remove hydrocarbons, the core sector would have been still higher.

   

• The positive cues from the core sector rubbed off on the IIP growth also, which has stayed above an average of 6% for the last one year. That is a robust rate of growth and is likely to get better as the lag effect of the core sector growth rubs off. What really stands out about the IIP growth is that it has been uniformly positive across the 3 key components of IIP viz. mining, manufacturing, and electricity. 

   

• Why is the combination of robust core sector and robust IIP important. It is this combination that has a strong impact on the GDP. For example, India reported real GDP growth of 7.8% in the first quarter of FY24 and a robust 7.6% in second quarter of FY24. This growth was only possible due to the strong support from the core sector and IIP. In the second quarter of FY24, the GDP growth was robust despite tepid growth in agriculture and tapering of the bounce in contact intensive service sectors. The growth in GDP in the second quarter was largely driven by the manufacturing sector.

What is special about the surge in manufacturing in the year 2023 is that it has been driven less by consumption demand and more by investment demand. The capital investment cycle in India had been long quiet and that is showing signs of reviving. Order books of most capital goods companies are overflowing and that is the most unequivocal sign that things are turning around for the better. Year 2023 was surely the year that growth finally arrived and, more importantly, it was led by manufacturing and a revival of capital cycle.

SERVICES TRADE SURPLUS OFFSETS MERCHANDISE TRADE DEFICIT

In October 2023, when India touched a record level of merchandise trade deficit at $31.5 billion, there were concerns that the current account deficit (CAD) could go through the roof. However, it normalized in November 2023. The table below captures the monthly merchandise trade data for 2023.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
Jan-23	32.91	50.66	-17.75
Feb-23	33.88	51.31	-17.43
Mar-23	38.38	58.11	-19.73
Apr-23	34.66	49.90	-15.24
May-23	34.98	57.10	-22.12
Jun-23	32.97	53.10	-20.13
Jul-23	32.25	52.92	-20.67
Aug-23	34.48	58.64	-24.16
Sep-23	34.47	53.84	-19.37
Oct-23	33.57	65.03	-31.46
Nov-23	33.90	54.48	-20.58

Data Source: DGFT

If you look back at year 2023, the merchandise trade deficit for the year 2023 has been averaging around $20 billion per month. India’s trade deficit has been largely driven by oil imports and select items of imports like gold, project goods etc. Here are some major takeaways from the numbers.

• More than half of the trade deficit is driven by oil imports. However, India made a big shift in 2023. It moved its predominant import basket from the OPEC nations to Russia. During the year, Russia accounted for more than 40% of India’s oil imports. This meant that India’s trade deficit with Russia spiked, but it also meant that trade deficit in 2023 was lower by 12% compared to 2022. That is what the big Russian story of oil is all about. 

   

• When the US and the Western nations imposed sanctions on Russia, India was a marginal player in the Russian export basket. At that point Russia was desperate to sell oil and even offered discounts ranging from $20 to $30 per barrel. This substantially reduced the cost of crude oil for India and was one of the main reasons for the lower merchandise trade deficit in 2023. This was also the year when the services surplus came of age.

   

• Services surplus is largely from IT exports, but also include other services like consultancy, outsourcing, global audit, global competency centres (GCC) etc. If you look at FY24 over FY23, the services surplus is up 18.12% till date. That also means that out of the FY24 cumulative of $166.35 billion till date, the services surplus at $104.91 billion, wipes out nearly 63% of the merchandise trade deficit. In a year when the merchandise trade deficit has been persistently volatile, it is this services surplus that has ensured the current account deficit stays in check.

India continues to depend on imports for meeting over 80% of its crude oil requirements and hence merchandise trade deficit is inevitable. What stands out about 2023 is how key components of trade deficit like crude oil and gold were managed and how the services surplus has come to offset nearly 63% of the merchandise trade deficit.

YEAR 2024 – FROM STAGFLATION RISKS TO THE GOLDILOCKS MOMENT

Just a little over a year back, around the middle of 2022, there were concerns that the Indian economy could slip into stagflation mode. Now, stagflation is a rather dangerous situation when the growth is too low and inflation is too high. In short, the economy is stagnating, largely due to supply side factors, but inflation keeps going up for the very same reason. That was a situation that India wanted to desperately avoid. To an extent, it must be said that, in 2023 India not only avoided the stagflation risks, but also moved the Indian economy into the start of the Goldilocks moment.

Goldilocks is the kind of an ideal situation when the economic growth is much higher than expected and the inflation is much lower than expected. That is surely something that India has managed to achieve in the year 2023. Thanks to sustained capital spending by the government and the return of the animal spirits of capitalism, growth is back in right earnest. For now, inflation is in control and the sharp fall in core inflation shows that the fall is for real. Year 2024 is when the real Goldilocks moment should materialize for the Indian economy. That will be Big News!