Indian Economy Sustains Momentum As World's Fastest-Growing Major Economy

In 2023, India has achieved significant milestones, including a historic feat of achieving a successful soft landing near the lunar south pole, becoming the first country worldwide to do so. According to the IMF's projections from the previous year, India has also ascended as the world's fifth-largest economy, following the US, China, Japan, and Germany. Furthermore, the nation will also host many notable events, including the G20 summit and the ICC Cricket World Cup.

As the nation looks ahead, its economic health remains in good shape despite hiccups stemming from the erratic progress of the monsoon and a global economic slowdown. India's growth prospects remain upbeat, with estimated growth rates averaging above 6 per cent over the next five years. This trajectory positions India to become the world's third-largest economy by 2027-28, solidifying its role as a significant driver of global economic growth. The Indian economy is projected to grow by 6.5 per cent in the current fiscal year. 

The medium to long-term drivers of India's economic growth emanate from several key factors, including its demographic advantages, favourable geopolitical advantages with growing emphasis on friend shoring and China plus one, and prudent government policies. In an aging world, India has surpassed China to become the world's most populous nation, with approximately 64 per cent of its population falling within the working age group. This demographic advantage provides India with a large labour pool and contributes to the development of an aspirational consumer economy. While a growing population can be a double-edged sword, India has experienced success with the labor-intensive services exports led by the IT and BPO sectors.

With a renewed emphasis on manufacturing, particularly electronics, preliminary trade data indicates the potential for success in this sector as well. Leveraging favorable policies like Production Linked Incentives (PLI) and offering domestic market access, the government has successfully allured a handful of foreign corporations to relocate some of their manufacturing operations to India, thereby creating jobs.

The global search for a reliable partner to diversify supply chains in the wake of disruptions caused by the pandemic and the war in Ukraine has further aided the government's efforts to encourage foreign investments. Given its growth potential, India has emerged as an oasis of hope for the slowing global economy. 

The Indian economy has traversed a long journey since the economic liberalisation of 1991, and it has reached a point where further reforms are essential to sustain its growth momentum. Over the past couple of years, a series of reforms have been implemented, bolstering India's growth prospects and enhancing its economic resilience. The introduction of the Jan Dhan, Aadhaar, and Mobile (JAM) Trinity, coupled with the remarkable success of the Unified Payments Interface (UPI), has not only deepened financial inclusion but has also ushered in a transformative era for digital financial infrastructure.

Despite the initial challenges and opportunities for further refinement, the Goods and Services Tax (GST) has successfully unified consumers under a single indirect tax regime and propelled the formalization of the economy, thereby reducing inefficiencies and leakages. Banking reforms alongside the implementation of the Insolvency and Bankruptcy Code (IBC) have yielded some success in expediting the resolution of stressed assets and addressing the issue of high non-performing assets. Collectively, these key reforms will embolden India's growth momentum going ahead. 

In the near term, the Centre has upheld its commitment to capital expenditure and fiscal discipline. Despite the allure of myopic gains stemming from increased revenue expenditure and subsidies, it has maintained its focus on capital expenditure, even in the face of an impending general election.

Each rupee allocated to capital expenditure yields a substantial multiplier effect, amounting to 2.45 rupees in the immediate year and an impressive 3.14 rupees in subsequent years. This starkly contrasts revenue expenditure, where every rupee invested has a far more modest multiplier effect of 45 paise in the immediate year, with only an additional ten paisa multiplier effect in the subsequent years.

State-level capital expenditure, which had subdued growth in the previous year, rebounded impressively in the first quarter, exhibiting an annualized growth rate of 74%. The strong growth in state capex can be attributed to the implementation of conditional support from the Centre. In synergy with government’s efforts, private capital expenditure is also poised for an upswing, aided by deleveraged balance sheets, and improving capacity utilization.

Despite the normalisation of the base effect, the economy is projected to achieve a growth rate of 7.7% in the first quarter of this fiscal year. This growth is underpinned by an acceleration in construction activities driven by robust capital expenditure and a steadfast domestic consumption. Growing investment inflows has improved balance of payment situation and resulted in accretion of RBI’s reserves which further imparts confidence on the economy. 

(Author is Senior Associate Economist at CareEdge Ratings. Views expressed here are personal)