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DISCUSSION & ANALYSIS

MACROECONOMIC REVIEW

In the face of a challenging global environment, those who are agile and adaptable can still find opportunities to succeed. Despite concerns over a potential slowdown in advanced economies, persistent inflation, and recent banking sector turmoil in the US and Europe, the potential for growth and success remains high for those who are willing to take calculated risks and pursue innovation. With a flexible and forward-thinking mindset, individuals and organisations can not only weather the current uncertainty but also emerge stronger and more resilient in the face of future challenges. Nevertheless, the Indian economy is better placed in this challenging environment than its peers. While the global economy is expected to slow down or even enter a recession in 2023, India has shown resilience and is emerging stronger than anticipated from the pandemic years. The economy has been steadily gaining momentum since the second quarter of the current financial year.

As per the provisional estimate of the National Statistical Office, the economy grew at a decent pace of 7.2% in FY23. This contrasts with the 9.1% growth in the previous fiscal year, which benefitted from a favourable statistical base. With all major sectors being above the pre-pandemic level, the recovery from the pandemic shock has been fairly broad-based. During FY23, the Gross Value Added (GVA), a measure of aggregate supply, grew by 7%. Overall GVA growth has been driven by services (9.5%), agriculture & allied activities (4.0%) whereas the industrial sector (4.4%) posted deceleration amidst intensified input cost pressures from last year. Capital spending saw a sharp recovery, most driven by Government spending on infrastructure. Both private consumption and Government consumption grew at a slower rate than the previous year. While the growth in exports as well as imports has decelerated from last year, the growth in imports outpaced that of exports in FY23.

Consumer price inflation remained high, and core inflation continues to remain sticky. The Consumer Price Index (CPI) based inflation averaged 6.65% during FY23 versus 5.51% last year. With its inflation-targeting mandate, RBI raised the policy rate by 250 bps to 6.5% cumulatively in FY23. However, input cost inflation, as reflected in the Wholesale Price Index (WPI) based inflation, indicated significant moderation during the second half of FY23. The WPI-based inflation averaged 9.4% in FY23, which was lower than the average of 13% last fiscal year. The decline in input cost pressures was found to be greater for the industrial sector than for the farm sector. India recorded a Current Account Deficit (CAD) of 2.7% of Gross Domestic Product (GDP) in 9M-FY23 compared to 1.1% in 9M-FY22. This was on the back of a sharp increase in merchandise trade deficit. During FY23, the merchandise trade deficit of India widened to USD 266.78 Bn, 40% higher over the last year. Following aggressive rate hikes by the US Federal Reserve, risk-off sentiments were accentuated amongst foreign investors. Foreign Portfolio Investment (FPI) outflows from the Indian markets amounted to almost USD 5.5 Bn in FY23. As a result, the rupee depreciated by nearly 8% to _ 82.22 per dollar as of March 31, 2023, over March 2022 (_ 75.81 per dollar). On the positive side, India maintained sufficient forex reserves at USD 578.5 Bn (March 31, 2023) to finance the CAD and intervene in the forex market to manage volatility in the rupee. The Central Government met its fiscal deficit target of 6.4% of the GDP supported by higher nominal GDP growth, robust tax collections and subsidy rationalisation. The Government’s push towards infrastructure creation led to a CAPEX growth of 24% (y-o-y) in FY23.

The financial conditions turned tighter during the second half of FY23 following monetary policy tightening and healthy credit offtake. Liquidity in the banking system turned into a deficit intermittently due to transient factors like advance tax outflows, GST outflows, State bond auctions, among others. However, RBI injected liquidity regularly through variable repo auctions to protect the positive credit sentiment. Higher Government spending too supported liquidity creation during FY23.

Outlook for FY24

Global growth is forecasted to slow from 3.4% in 2022 to 2.8% in 2023 as per International Monetary Fund’s (IMF) World Economic Outlook, April 2023. A sustained inflation in many economies, rising interest rates and negative global spillover effects from the war in Ukraine is expected to dampen trade growth in the CY23. This is reflected in the lower global trade growth forecast by the World Trade Organisation at 1% in 2023 from 3.5% in 2022. Due to potential global economic slowdown, persistent inflationary pressures and reduced external demand, India’s GDP growth in FY24 may be slower. While there are some positive factors such as continued government investment, reduced corporate debt, a low level of stressed assets in the banking sector, the Production-Linked Incentive (PLI) scheme, and the possibility of stable global commodity prices, they may not be enough to push GDP growth beyond 6% in FY24.

Most of the projections for India’s economic growth for FY24 hover near 6.0% as compared to 7.0% in FY23. On the positive side, consumer inflation is expected to moderate in FY24 partly due to the lagged impact of the RBI’s aggressive monetary tightening throughout FY23 and partly on account of a favourable statistical base. CRISIL ratings expects CPI-based inflation to average 5% in FY24 due to lower commodity prices, expectations of softer food prices, cooling domestic demand and base effect. There are higher chances that relatively lower inflation and lower-than-expected gross market borrowings announced by the Central Government will somewhat lower the cost of borrowings during FY24. Relatively softer global commodity prices, especially the prices of energy products and a healthy growth momentum in the services exports may lower the CAD to 2.0-2.5% of GDP in FY24. The lower CAD and India’s relatively better economic performance than other emerging market economies will support the rupee during FY24.

		World		United
Institute	IMF		OECD		RBI	Fitch	Moody	S&P
		Bank		Nations
India’s FY24
Growth
				6.7			6.5
Projections from	5.9	6.3	6		6.5	6.0		6.0
				(CY2024)			(FY2024)
International
Agencies

Possible Threats a. Global Risks

i. Global Slowdown

As India’s growth cycles are linked to those of advanced countries through the trade and financing channels, a sharper-than-expected slowdown/recession in advanced economies due to the monetary tightening or the ongoing banking troubles can create a downside to India’s economic growth outlook. ii. High Global Debt

High global leverage amid rising interest rates and slowing growth creates conditions for financial stress. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer for emerging market economies like India. iii. Geopolitics

A further spike in geopolitical tensions, which already remain elevated, can cause sharp spikes in global crude and commodity prices, disrupt the supply chains and trade further, increase fiscal spending and create a downside risk to India’s growth.

b. Domestic Risks

i. Possibility of El Nino

The potential occurrence of El Nino conditions could hurt the prospects of crop output and rural demand and put upward pressure on food inflation. If inflation rises above the RBI’s tolerance level, a delay in taking a ‘pause’ and tighter monetary conditions could impact growth negatively. ii. Climate Risks

Climate change has begun to play out in the form of rising global temperatures and increased frequency of extreme weather events like droughts, cyclones, heat waves, and flooding. According to Cross Dependency Initiative, which specialises in climate risk analytics for companies, banks, and regions, the vast majority (80%) of 50 provinces facing the highest climate risk to their physical infrastructure by 2050 are in China, the US, and India. These developments may have implications for India’s food security.