The Economic Survey for FY23 presented today provided a comprehensive assessment of the Indian economy for the current year and the outlook for the ensuing year. The survey has also examined certain pertinent aspects and ideas for the country’s economic development. This report presents a summary of the survey encapsulating the important announcements.
Resilient Economy Despite Global Headwinds
- The Economic Survey for FY23 has reaffirmed the resilience of the domestic economy and indicated GDP growth in the range of 6.5-7% in FY23.
- The survey expects the Indian economy to grow at 6.5% in FY24 gaining support from robust domestic demand and a pick-up in capital investment. However, with plateauing of export growth and cooling of pent-up demand, focus on capex growth will be crucial to support growth and employment in the economy.
- Upside factors to support growth are continued normalisation of supply chains, stable domestic inflation and improvement in capital flows to India. The strength in the balance sheet of corporates and banks will also aid new private sector capital formation.
- Further, government measures such as PM GatiShakti, National Logistics Policy and PLI schemes to boost manufacturing output will help in unleashing animal spirits in the economy.
- Downside risks to growth exist owing to the prolonged monetary tightening cycle, elevated commodity prices, plateauing export growth, depreciating rupee and its unfavourable impact on the current account balance.
Medium-Term Growth Outlook: Growth Magnets for this Decade (2023-2030) • As per the survey, India’s potential GDP could rise to 7-8% per annum in the medium term. • Growth will be supported by a sound financial system, digitalisation reforms, formalisation and geopolitical opportunities.
- However, there is a need for further reforms in the areas of the power sector, education and skilling, climate change and improving the Ease of Doing Business through measures like simplification of compliances and support for the MSME segment.
Fiscal Prudence and Focus on Capex to Aid Growth
- The government is on track to achieve the budget estimate for the fiscal deficit in FY23 owing to a recovery in economic activity and buoyancy in revenues from direct taxes and GST.
- Rationalisation of GST, simplification of tax compliances and ending the uncertainty surrounding retrospective taxation has led to increased formalisation of the economy and enhanced compliance.
- Despite the higher requirement for revenue expenditure in terms of increased food and fertiliser subsidy, reduction in taxes on fuel etc., the government’s focus on capital expenditure continued during the fiscal. • The survey notes that higher capital expenditure on infrastructure-intensive sectors has positive implications
for medium-term growth through strengthening aggregate demand and crowding in private investment. • The survey also underlines the importance of fiscal prudence and discipline followed by the governments which contribute in lowering the cost of capital for all sections of society.
Inflation Expected to Ease Though Risks Remain
- The survey highlights that crude oil prices (the main driver of inflation this year) and other commodity prices have moderated. As a result, both CPI and WPI inflation are on a declining trend. The inflationary pressures are expected to ease in FY24 from the levels seen during this year.
- Economic Survey Reaffirms Resilience, Estimates FY24 GDP to Grow at 6.5%
- Upside risks to the inflation projection: The possibility of re-emergence of Covid-19 in China could trigger supply-chain disruptions whereas, reopening of China and the impact of geopolitics associated with oil could put upward pressure on commodity prices and contribute to our imported inflation.
- Domestically, elevated prices for cereals, milk and spices pose an upside risk to food inflation whereas, delayed pass-through of input prices to consumers could keep core inflation sticky.
Shock Absorbers of the External Sector to Cushion Global Headwinds
- The survey noted resilience of exports during FY23 (April to December) on the back of strong macroeconomic fundamentals and buffers. High FX reserves, sustainable external debt indicators and a resilient domestic currency are expected to pose as shock absorbers.
- Efforts to promote international trade settlement in Indian Rupee have been taken up. • Schemes such as Interest Equalisation Scheme, Remission of Duties and Taxes on Exported Products (RoDTEP) and Export Credit Guarantee, amongst others will play a key role in enhancing exports. • Government measures to diversify exports in terms of both products and markets, along with the facilitation of trade agreements are expected to improve export competitiveness.
- The survey highlighted potential challenges emanating from widening of current account deficit (CAD) due to elevated commodity prices.
Broad-based Recovery in Service Sector
- Measures such as permitting 100% foreign participation in telecommunication services, raising of FDI limit for insurance companies and launch of National Single-Window systems have helped in facilitating investment. • The survey notes the exceptional resilience of the Information Technology-Business Process Management (IT BPM) and the E-commerce industry. Other bright spots include industries such as tourism, hotel, and real estate.
- The economic survey expects the Central Bank Digital Currency (CBDC) to provide a significant boost to digital financial services.
- The survey foresees an uptick in high-frequency indicators for the contact-intensive services sector, reflecting a strong growth opportunity in FY24.
Green Shoots of Revival in Industrial Activity
- Resilient domestic demand is expected to drive industrial output going ahead.
- Improving capacity utilization and robust credit growth in the industry point to bright prospects of capex investments by companies.
- Production-linked incentive (PLI) scheme to play a catalyst in boosting exports.
- Introduction of the Emergency Credit Linked Guarantee Scheme (ECLGS) has played catalyst in increasing credit to MSMEs.
- Easing input cost pressures due to moderation in international commodity prices is expected to bode well for company margins.
Physical and Digital Infrastructure
- The survey applauded efforts such as creation of Dedicated Financing Institution (NaBFID), the National Logistics Policy and the revamp of the Viability Gap Funding scheme for enhancing the role of physical infrastructure.
- Initiatives such as CoWIN, e-RUPI, TReDS, Account Aggregators, Open Network for Digital Commerce (ONDC) are expected to tap into India’s digital public infrastructure space.
- As per the survey, robust and growing public digital infrastructure can add around 30-50 basis points to India’s potential GDP growth rate.
Economic Survey Reaffirms Resilience, Estimates FY24 GDP to Grow at 6.5%
- Complementary to the vision of ‘Minimum Government, Maximum Governance’, the survey identifies the following measures, as a key to attaining equitable economic growth:
– Stepping up learning outcomes through digital and teaching interventions in schools – Enhancing the role of community workers in healthcare
– Pushing Self-Help Groups (SHG) through better product design and upscaling enterprises • Affordable market alternatives for care work, safe transportation and lodging, and long-term counselling support seen as measures to capitalise the gender dividend for the country’s future economic and social development.
- Improvement of basic facilities in schools and rising availability of teachers under the National Education Policy (NEP) framework is expected to contribute to the country’s long-term growth prospects.
Focus on Energy Transition to Combat Climate Change
- India’s energy transition efforts were led by adopting a Low GHG Emission Development Strategy. • Non-fossil fuel-based installed capacity target was raised to 50% in its updated Nationally Determined Contributions (NDC), after achieving the 40% target in the first NDC.
- Sustainable finance framework has improved company coverage from 100 top listed companies to 1000 top listed companies on a mandatory basis, for sustainability reporting.
- The survey identifies the availability of adequate and affordable finance as a constraint in India’s climate actions.
The survey has reaffirmed India’s economic resilience in midst of the global slowdown and expects the economy to grow at 6.5% in FY24. This is higher than our expectation of 6.1%. While India will maintain healthy growth momentum, we believe there is a need to be cautious given the slowing global growth. Moreover, some fizzling out of the pent-up demand is also expected in FY24.
The survey also talks about potential GDP growth of 7-8% per annum in the medium term. We feel that this higher potential growth is achievable if some of the reforms required to improve productivity and improve Ease of Doing business are implemented in a timely manner. Moreover, there is a need to focus on inclusive growth, hence investment in human capital and support for the unorganised sector and MSME segment becomes critical.
On inflation front, the survey highlights that overall inflationary pressure could be expected to ease in FY24 from the levels seen during this year. This is in line with our expectation of average CPI inflation moderating to 5.1% in FY24 from 6.5% in FY23.
In midst of concerns around the global economy, the survey highlights that the external situation is manageable given our high forex reserves and low external debt. With export slowing, we expect CAD to remain high at around 2.2% of GDP in FY24, but much lower than the estimated 3.5% of GDP in FY23. Given the volatile and uncertain global environment, there is a need to remain cautious on the external sector.
Overall the survey paints an optimistic picture of growth supported by moderation in inflation and manageable external situation. To attain the potential growth, the government should act quickly on some of the reform measures highlighted in the survey and should take steps to grab the geopolitical opportunity.