In the face of global uncertainties, India’s economy has fared better this fiscal.
Vasundhara Sanger
Posted on 17/07/2023
India’s economic growth rate is higher than that of many peer economies, regardless of the global recession, and this is due to relatively strong local consumption and a lower reliance on foreign demand.
Three months into this fiscal, India’s economic story from April to June 2023 highlights the government’s dogged support of its capital expenditure. Notably, the government had hiked its capex spending plan in the 2023-2024 union budget to Rs 10 lakh crore, a 33% jump from last year’s outlay of Rs 7.5 lakh crore. However, investments by private players have been below expectations. Thus, the big capex spend by the government expects to attract more private investments through the phenomenon of ‘crowd-in’ of private sector investments.
One reason for cautious private investment is the lacklustre demand. As investment is majorly driven by demand, the big push must emanate from low consumption. For this, more jobs have to be created, leading to more income.
That brings the focus on the GDP growth, which is not generating enough jobs even though the government is doing its work, but it has fiscal constraints. Nevertheless, the government is making all efforts to attract private investments in the country. Among the steps adopted to increase private investment in the nation (apart from higher capex) are tax reduction, PLI initiatives to encourage manufacturing and other incentives. Additionally, if oil prices continue to rise, it will put further pressure on the rupee, which has already declined in the last year. From an average exchange rate of about INR 75 in April 2022, against the US dollar, the rupee fell to INR 79.03 by June 2023.
Macro economy-wise, the genuine concern is unemployment. India’s unemployment rate increased in April 2023 to 8.11% from 7.8% in March 2023. However, it fell to 7.7% in May 2023 due to a decline in labour participation.
A higher rate of unemployment not only results in social disparity but also directly reduces aggregate consumer demand. This will slow down the future GDP growth rate, which is reasonably robust, having bounced back from COVID time when, from April to June 2020, India’s GDP dropped by a massive 24.4%. But, the light keeps shining in the dark. India’s GDP is currently on track to reach $3.75 trillion in 2023 from about $2 trillion in 2014, making it the fifth-largest economy in the world. Undoubtedly, the Finance Minister recently termed India a “Bright Spot” in the global economy. RBI expects India’s 2023-24 GDP growth at 6.5%, with quarter Q1 at 8.0%, on the back of supportive domestic demand conditions.
Furthermore, the growth in bank lending has increased liquidity in the economy. Bank lending has risen to 15.9 % in April 2023 from 15 % in March 2023, indicating consistent economic growth.
Besides, consumer spending has been rising as well. It is expected to grow by 7.1% year-on-year in 2023. One of the main factors influencing the expected rise in consumer expenditure in the market is the broader economic recovery anticipated in India. As we know, auto sales numbers are keenly watched because they are a key indicator for assessing private consumption, which has more than 50% weightage in calculating the country’s economic growth. Indian auto manufacturers reported an increase in passenger vehicle sales in June of this year, aided by demand for new models. Almost 3.27 lakh passenger cars were sold — when compared to June of the previous year, the sales grew by more than 2%. Luxury two-wheeler producers also experienced sales gains owing to consistent urban demand.
While consumer spending is robust, the growth in manufacturing spending is lagging. Hence, the government is investing more to compensate for the same, which will temporarily affect the fiscal deficit. However, it is possible to meet the fiscal deficit target of 5.9% despite the rising government investment if direct tax collection and GST collected continue to be strong. According to the Ministry of Finance, the GST revenue in June 2023 stood at Rs 1,61,497 cr, which is a 12% rise based on year-on-year. High GST collection signifies a rise in domestic demand and overall economic vibrancy. Therefore, business sentiments (if not rising drastically) are not declining either. On the political front, whether the general elections next year have any bearing on business sentiments remains to be seen in the coming months.
The IMF’s World Economic Outlook, published in April 2023, predicts a sluggish global recovery but high growth rates for India. The Union government and numerous state governments’ significant increases in the budgeted capital spending will stimulate economic activity in the interim.
India is anticipated to rank among the top three economic powers in the world over the coming 10 to 15 years, supported by an effective democratic system and solid alliances.
