The Brief: Surprises in Store for the Indian Economy?

THE INDIAN ECONOMY has completely recovered from the pandemic-induced slowdown and is all set to register a strong, sustained growth for the next 25 years — according to the message conveyed by the Economic Survey 2022-23, presented in Parliament on January 31. The survey estimates India’s GDP will grow close to 7% in FY23, 6-6.8% in FY24, and an average 6.5% in the medium term. The projection for FY23 is primarily based on the uptick in private consumption and capex led by the government during the first eight to nine months of FY23. There are also projections that FY24 growth could be towards the lower end of 6-6.8% rather than 6.5%. The projections are more or less aligned with the India growth estimates made by the IMF, World Bank and other agencies, and in that sense, justifiable.

While it is clear that India is among the fastest-growing major economies of the world, what is not certain is the reliability of medium-term growth predictions in a world that is so interconnected and increasingly susceptible to sudden shocks such as Covid-19. As the Survey notes, at least three shocks have hit the global economy since 2020. The first was the pandemic-induced contraction of global output. The second was the Russia-Ukraine conflict leading to a worldwide surge in inflation, and the third, the fallout of the decision of central banks led by the U.S. Federal Reserve to tackle inflation through synchronised policy rate hikes. All three impacted countries across the world, and India was no exception.

True, the Indian economy appears to have recovered faster than most, but that does not insulate the country from future shocks. As one analyst points out, even the FY23 projections are based on assumptions that there will be no further pandemic-related disruption, monsoon will be normal, central banks will undertake orderly withdrawal of liquidity, oil prices will remain range-bound and global supply chains will ease gradually.

The optimism shown in the Survey is based on the hope that multiple structural reforms taken over the years, better economic health of corporates and bank balance sheets, and public sector capex push will together induce growth in the medium term.

A restored credit cycle will rejuvenate the Indian private sector capex cycle, which alone will bring in 6% annual growth, according to the Survey. Higher economic efficiency resulting from public digital infrastructure created over the last six-seven years will add 30- 50 basis points to the potential GDP growth. Once the growth effects of the maturing of India’s public digital infrastructure and formalisation of economy and financial inclusion are in full play, India will achieve an average 6.5% real GDP growth in the medium term, it says.

However, the picture is still not clear.

“The hope is that all of it should help in starting a new private sector capital formation cycle — signs of which are visible. However, global risks of slowdown/recession, tighter financial conditions and external sector imbalances pose a threat”, says Madhavi Arora, lead economist, Emkay Global Financial Services.

Nobody would want to discount India’s growth potential. But it may be too early to arrive at conclusions which the Survey makes on India’s medium-term growth. As the Survey itself observes, “The year (2023) promises to be far from predictable and may hold surprises for countries and households”.