India’s Economic Landscape in 2023: Challenges, Triumphs, and Global Visions
By Dr. Arun Singh
Overview of the current state of the Indian economy in 2023
India achieved a robust 7.7% GDP growth in H1 FY24 despite global economic challenges and geopolitical risks. Industrial activity saw a consistent rise, reflected notably in a decade-high non-food credit growth despite increasing lending rates. Business and consumer confidence remained strong, supported by resilient rural demand despite inflation and high interest rates. Investment growth and the investment-to-GDP ratio increased in FY23 and continued strong in H1 FY24, driving growth. The government’s infrastructure spending and rising private investments, alongside robust domestic demand, are poised to offset weaker-than-expected exports in FY24.
Key macroeconomic indicators that are most important for assessing India’s economic health at the moment
Monitoring inflation, export growth (both in merchandise and services), private sector investment, and rural demand remain critical areas for vigilance. Inflation reached 5.55% as of November, posing concerns. Sustained inflationary pressures could prompt the Central Bank to delay rate cuts or consider hikes, potentially hindering overall growth. Weak exports, globally disrupted supply chains, and potential impacts on India’s export growth could dampen the current growth trajectory. India has transitioned from twin balance sheet stress to advantage, with strengthened bank and corporate balance sheets, fostering a positive investment climate. However, geopolitical uncertainties or rising interest rates might curb business capital expenditure, impacting government-driven investments crucial for sustaining robust growth. Rural demand might face challenges due to potential interest rate hikes or bans on agricultural exports, potentially straining growth. A combination of weakened external trade and reduced rural demand could notably impact the MSME sector and overall growth.
India’s position in terms of international trade and economic partnerships in 2023
India’s robust growth contrasts with lackluster export performance. From April to October, 16 of its top 20 export markets showed negative growth, with positive growth seen only in Australia, the UK, Netherlands, and China. However, UK and China exhibit slowing growth. Despite this, achieving the government’s $2 trillion export target by 2030 underscores the urgency for early deals and free trade agreements. India’s growing global prominence is pivotal for strengthening bilateral relationships. Having signed 13 free-trade and 6 limited-coverage preferential trade agreements, India actively engages with the EU, UK, Canada, Russia, Czech Republic, Peru, and Oman. Notably, it took 12 years for India’s exports to grow 1.8 times to US$777 billion in FY23 from US$478 billion in FY18, making doubling exports in the next seven years a formidable challenge.
How external factors such as geopolitical events have impacted the Indian economy
Geopolitical hurdles and economic uncertainties have been impeding the government’s endeavors to enhance Foreign Direct Investment (FDI) inflows into India. The net FDI plunged from US$ 19.6 billion a year ago to US$ 4.5 billion during April-September 2023. Rupee depreciated to its lifetime lows even, however, the volatility has been effectively managed by the Central Bank. The transcontinental India-Middle East-Europe Economic Corridor (IMEEC), faces geopolitical challenges, as it will pass through Israel. Recent statements from the Israeli president warning of an impending long and arduous conflict further compound the challenges associated with this corridor.
Performance of specific sectors such as agriculture and MSME in 2023, and the challenges or opportunities they are facing
According to the quarterly survey of MSMEs across India to gauge their optimism for business activity, conducted by Dun & Bradstreet and ASSOCHAM, it was found that, optimism amongst small businesses for domestic demand and profitability has inched up to 7 quarters high in Q4 2023. In anticipation of robust demand, small businesses are actively ramping up their capacity expansion efforts and recruiting more employees, which bodes well for the overall growth momentum. Data from the TransUnion CIBIL also shows that post pandemic delinquency rates have fallen for MSMEs improving MSMEs borrowing prospects. However, improving credit access for MSMEs is crucial for them to grow sustainability. Dun & Bradstreet’s recent whitepaper highlights challenges such as a 28% loan rejection rate. Proposed solutions include a PPP venture like Japan’s Credit Risk Database to tackle the lack of credit history, potentially reducing the high MSME lending rates reaching 4.7%. Implementing strategies from Hungary, South Korea, and Japan, like expanded credit guarantee schemes and improving loan recovery processes, can further bolster MSME growth by enhancing lending.
Major economic risks and challenges for India in the near future, and how might they be mitigated
Should global crude oil prices surge past US$100 per barrel, the repercussions could amplify inflation, widen the current account deficit, and intensify concerns about currency depreciation. This scenario might prompt the RBI to restart rate hikes, impacting credit flow as the previous round of increases hasn’t fully taken effect. Climate change-induced events like erratic monsoons or droughts pose significant challenges to agricultural productivity, potentially deeply affecting rural demand due to a significant reliance on this sector by the workforce. India faces a medium-to-long-term challenge in low productivity, with its 21% contribution of total factor productivity (TFP) to growth contrasting starkly with China’s 49% and Slovakia’s 71%. Enhancing India’s TFP involves reallocating land and labor from primary sectors to other economic segments. Investments in physical infrastructure such as highways, dedicated freight corridors, and human capital development are crucial. Timely execution of infrastructure projects and a steady supply of skilled labor are imperative to sustain productivity growth. Creating more non-agricultural job opportunities, especially in rural areas, becomes critical to bolster female labor force participation, potentially enhancing overall productivity. Additionally, advancing formalization and digitalization initiatives can significantly boost India’s productivity in the medium to long term. Encouragingly, the government has actively initiated measures reflected in increased GST registrations, MSME registrations in UDYAM, and rising registrations in the EPFO and E-SHRAM portal (a first-ever national database of unorganized workers).
(The author is Dr. Arun Singh, Chief Global Economist, Dun & Bradstreet, and the views expressed in this article are his own)
