There are many factors going for India—the country’s tax collections have been robust; it stands to gain from the China-plus-one policy due to the latter’s Covid-19 restrictions, etc—but manufacturing is yet to pick up. All eyes are now on Budget 2023-24
The year 2022, coming after a numbing 2020 and a despondent 2021 thanks to the crippling Covid-19 pandemic, had started with the hope of recovery. Economic activities had been impacted globally due to the health crisis. World order was to be restored in 2022. But less than two months into the new year, the Russia-Ukraine war began, striking a big blow to the global supply chains.
The biggest casualty this year was the idea of globalisation as we knew it. Covid-19 put to test the theory of open trade. Several experts have opined that the economic connectedness between countries because of globalisation made the economic fallout of the pandemic worse, especially for major countries. In a report in July, Nomura had predicted that several of the world’s biggest economies, including the US, the European Union, Australia, Canada, Japan, the UK and South Korea, would enter recession in the next one year. Add to that China’s bleak economic recovery trajectory after three years of pandemic-related restrictions
The Year That Was
The year has been historic in ways more than one. Global inflation was at a 50-year high; China witnessed the weakest growth in 45 years; the US dollar was its strongest in 20 years and the world saw the most aggressive rate hike cycle in close to 40 years.
As the global economy stares at possible recession, India, being part of the globalised world order, may not be able to completely escape the spillover effects. Most brokerages and rating agencies had said that it would be one of the better performing economies in 2022. But, even before Covid-19 struck, India was facing high inflation and had eight successive quarters of falling growth, unlike developed countries that saw inflation spiraling only post-Covid and the Russia-Ukraine war. India’s journey back to normal growth would be a more daunting task.
“The balance of risks is increasingly tilted towards a darkening global outlook and emerging market economies (EMEs) appear to be more vulnerable, even though incoming data suggest that global inflation may have peaked. The near-term growth outlook for the Indian economy is supported by domestic drivers as reflected in trends in high frequency indicators,” the Reserve Bank of India’s December outlook says.
Hiccups Ahead
The International Monetary Fund (IMF) projections show that global growth will slow down to 2.7 per cent in 2023 from 3.2 per cent in 2022 and 6 per cent in 2021. In such a situation, all central banks are moving towards the tight lending rate territory which would further slow down global growth. Its impact on India is showing; merchandise exports in October fell by 12 per cent year-on-year and went up by less than 1 per cent in November. Nomura has highlighted that India’s growth rate cycle may have peaked and that the GDP growth in 2023 might fall to 4.5 per cent compared to the expected 6.7 per cent in 2022, forcing RBI to opt for several rate cuts in the second half of next year.
“In 2023, we expect a global growth slump to play an outsized role in influencing domestic growth, with exports likely to fall precipitously, especially through January-June, when the global hit will likely be most severe. The private capex upcycle has remained lacklustre, while global uncertainty and tighter financial conditions are likely to weigh on corporate investment plans, resulting in weaker fixed investment growth,” Nomura’s 2023 outlook says.
India In 2023
Going forward, as emerging markets like India will have to deal with the problem of a strong dollar and rising commodity prices. Generally, both do not move in the same direction, offering a safety net to importing nations like India. But the dollar and the commodity prices have moved in the same direction in 2022 and are expected to continue to do so in 2023.
In what can be seen as the green shoot, the problem of twin balance sheets, high corporate debt and banks struggling with bad loans, has been considerably rectified. In the last five years, there has been considerable deleveraging and corporate debt-to-GDP ratio is now at its lowest in over 10 years. Banks have also cleared their bad loans legacy problem. The Centre’s tax collections, both Goods and Services Tax (GST) and direct taxes, have been robust, highlighting recovery in the corporate sector. States have also seen a fall in their net borrowings and consolidated deficits.
Agriculture has consistently contributed to overall GDP growth. The outlook for wheat production has been positive with higher support prices and other enabling factors, according to the RBI. Following China’s slow recovery, most global companies have adopted a China-plus-one strategy, seeking to diversify their businesses to other countries. India stands to gain here and has a chance to fill the vacuum created by China in labour-intensive manufacturing sectors like leather and textiles, among others.
However, manufacturing remains sticky. Factory output fell to a 26-month low in October. Core sector grew by just 0.1 per cent in October, the lowest in 20 months, which led to massive downward revisions in India’s growth projections for the next financial year by brokerages.
While the private final consumption expenditure (PFCE), a proxy for household and private sector consumption, showed recovery in the July-September quarter of the ongoing financial year and stood at 61.6 per cent of nominal GDP compared to 59.5 per cent a year ago and 61.1 per cent in the quarter ago, experts feel that PFCE is yet to witness a broad-based recovery since the current consumption demand is primarily due to goods and services that are consumed by families in the upper income bracket. That the consumption recovery is driven largely by consumption by families in upper income bracket is evidenced by the significant rise in imports in the last six months.
The Budget 2023-24 to be presented on February 1, the last full-year budget before the Lok Sabha elections in 2024, would be a crucial document to understand India’s roadmap to recovery.