India’s Economic Turnaround: A Beacon Amid Global Challenges

While the economy has already reached the last of the fourth quadrant with just two months left for the ceding of the FY 2024 – 2025, its just the time to delve into some of the significant arenas of the economic happenings.

The global economy turned out to be tolerant worthy in 2023 in spite of tightening financial conditions engendered by restrictive monetary policy stances, geopolitical tensions and geoeconomics fragmentation. Global GDP rose by 3.2 per cent in 2023 – which exhibited to be lesser by 0.3% the preceding FY, supported by buoyancy in the United States, and major emerging market and developing economies (EMDEs).

Global inflation eased to 6.8 per cent in 2023 from 8.7 per cent the previous year on the consolidations of monetary tightening and restoration of supply chains. Pandemic – induced loosening in fiscal policy exerted upward pressures on the global public debt – GDP ratio in an environment of sluggish growth and elevated interest rates. Global merchandise trade volume dipped by 1.2 per cent in 2023 from an expansion of 3.0 per cent in 2022, dragged down by rising trade restrictions and a rotation of demand away from goods to services.

Global financial markets exhibited bouts of volatility in response to fluctuating perceptions on the monetary policy trajectory among market participants in spite of high for longer stances articulated by central banks. Sovereign bond yields hardened in the first half of 2023 – 24 and exhibited sizeable two – way movements in the second half. The US dollar remained firm through the year, putting downward pressures on emerging market economy (EME) currencies.

However, amidst global uncertainty, the Indian economy exhibited a remarkable turn-around during 2023 – 24, with real GDP growth improving to 7.6 per cent from 7.0 per cent in 2022 – 23, supported by robust fixed investment. On the supply side, economic activity was supported by the improvement in the manufacturing sector’s profitability which benefitted from lower input prices as well as the sustained momentum in services activity, offsetting the slowdown in the agricultural sector.

Headline inflation moderated during 2023 – 2024 on the support of anti-inflationary monetary policy, active supply management measures, and corrections in global commodity prices. Core inflation exhibited a broad-based disinflation and has moved below 4 per cent from December 2023.

During the year, domestic financial markets evolved in an orderly manner. Money market rates hardened with the ebbing of liquidity surplus, partly due to an increase in government cash balances. Issuances of certificates of deposit (CDs) increased amidst sustained credit demand. After remaining range-bound during H1:2023 – 2024, sovereign bond yields softened on lower domestic inflation, announcement of inclusion of Indian sovereign bonds in major global bond indices, and lower than expected market borrowings programme of Government of India (GoI) announced in the interim Union Budget 2024 – 2025.

Equity markets registered strong gains on buoyant economic activity and corporate performance. The Indian rupee (INR) exhibited stability, supported by robust domestic prospects and improvements in India’s external position. The moderation in the current account deficit (CAD) amidst large capital inflows enabled addition to foreign exchange reserves.

Aggregate Demand:

Real GDP rose by 7.6 per cent in 2023-24 as compared with 7.0 per cent growth in 2022 – 2023, according to the second advance estimates (SAE) of the National Statistical Office (NSO). This acceleration was powered by solid expansion in investment demand, which more than offset the slowdown in private consumption demand and the drag from external demand. Real GDP growth was robust at 8.2 per cent during 2023 – 2024 (April-December). The acceleration in momentum in the Second Quarter sustained in the Third Quarter of 2023 – 2024.

Consumption –

Private final consumption expenditure (PFCE) – the mainstay of domestic aggregate demand – slackened in 2023 – 2024. Deficient and uneven south-west and north-east monsoon pulled down both kharif and rabi production. Two-wheeler sales, an indicator of rural demand, picked up in the Second Half of 2023 – 2024. Demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) also tapered in the Second Half, suggesting some recovery in rural demand. Urban demand was supported by improvement in labour market conditions, higher disposable incomes, tapering of retail inflation and double digit growth in retail credit. Domestic air passenger traffic, railway passenger traffic and passenger vehicle sales recorded robust growth. Both collection of goods and services tax (GST) and issuance of E-way bills registered steady expansion. Government final consumption expenditure (GFCE) displayed a modest expansion in 2023 – 2024 as the government remained committed towards its fiscal consolidation path.

Investment & Savings:

The rate of gross domestic investment in the Indian economy, measured by the ratio of gross capital formation (GCF) to GDP at current prices, moderated marginally to 32.2 per cent in 2022 – 2023 from 32.4 per cent in the preceding year. Available information for the constituents of the GCF for 2023 – 2024 indicate an increase in investment, led by the government’s sustained thrust on infrastructure, coupled with ebullience in the housing sector. The ratio of real gross fixed capital formation (GFCF) to GDP inched up to 34.1 per cent in 2023 – 2024 from 33.3 per cent in the previous year. Among the components of GFCF, the construction sector gathered traction as evident in robust growth in its proximate coincident indicators – steel consumption and cement production. Capacity utilisation (CU) of the manufacturing sector has remained above its long-term average. It increased to 74.7 per cent in the Third Quarter of 2023 – 2024 from 74.0 per cent in the previous Second Quarter. The seasonally adjusted CU was 74.6 per cent in the Third Quarter of 2023 – 2024.

Gross Domestic Saving to Gross National Disposable Income (GNDI) moderated to 29.7 per cent in 2022 – 2023 from 30.8 per cent in the preceding year, due to drop in household financial saving (net) to 5.2 per cent of GNDI in 2022 – 2023 from 7.2 per cent in the previous year, as households drew down excess saving accumulated during the pandemic to fund consumption and investment.

In consonance with the global trend, India had experienced a spike in household financial saving (net) to 11.6 per cent of GNDI during 2020 – 2021, as pandemic-induced restrictions on mobility and spending curtailed consumption of contact-intensive services. As a result, the accumulated stock of excess financial savings6 rose to 4.1% of GDP by FY ending 2021; with the ebbing of the pandemic and release of the pent-up demand, the stock of excess financial savings moderated to 0.7 per cent of GDP as at the end of March 2023.

Courtesy: Reserve Bank of India

Team Maverick