Site icon Policy Circle

Indian economy defies headwinds, but sagging exports, high public debt weigh

IndiaN economy, $5 trillion economy

Strong domestic demand powers Indian economy amid global challenges, but an export slump and rising government debt cause concern.

The Indian economy is performing well despite global challenges. Various factors such as increased auto sales, higher fuel consumption, rising UPI transactions, and an uptick in urban demand are contributing to the buoyancy, says a report by the finance ministry.

The report also highlights the challenges in the external sector that could affect India’s growth outlook for 2023-24. These challenges include volatility in global financial systems, sharp price corrections in global stock markets, the impact of El Nino effect, and modest trade activity and FDI inflows due to weak global demand. These factors are likely to weigh on economic growth, and the finance ministry is warning against any complacency. The report has also emphasised the need to continue the efforts to stabilise the economy.

READ | Shadow Banks: Navigating the complex landscape of NBFCs

Furthermore, Indian exports face another threat due to the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will require reporting the carbon content in exports to the EU starting from October 1, 2023. This additional burden negatively impacts India’s exports.

Despite these challenges, the Indian economy benefits from strong domestic demand and positive high-frequency indicators that depict a healthy state of the economy. India is among the fastest-growing major economies in the world. Additionally, rural demand is recovering with robust growth in two- and three-wheeler sales, which is crucial for sectors like Fast-moving Consumer Goods (FMCG) and automobile sales.

The government’s focus on infrastructure growth and investments in supply-side infrastructure is expected to pay off, leading to sustained economic growth that surpasses previous decades’ performance. Increased public sector capital expenditure and favourable credit conditions have contributed to real Gross Fixed Capital Formation (GFCF).

Moreover, consumption and investment demand have exceeded the pre-pandemic trend trajectory. Pent-up demand has boosted real Private Final Consumption Expenditure (PFCE) beyond pre-pandemic levels.

External factors bog down Indian economy 

However, external factors like the ongoing Russia-Ukraine conflict and geopolitical stress remain major pain points for the Indian economy. The government and the RBI expect Indian economy to achieve an economic growth rate of 6.5% in FY24. Although India is an outlier among economies that face a slowdown, it still faces challenges that need to be addressed without delay.

One major challenge is lower export growth in the second half of 2022-23, which, coupled with higher import rates, widens the Current Account Deficit and creates financial instability. While exports stagnate, India experiences higher import demand and prices due to weak external demand. The faster economic growth rates in the post-pandemic has led to negative net exports in real terms, preventing India’s real Gross Domestic Product (GDP) from surpassing the pre-pandemic trend trajectory.

Nevertheless, the situation is expected to improve with the decline in India’s import prices and a sustained surge in service exports. This is likely to reduce the net exports gap sooner than expected, enabling real GDP to exceed its pre-pandemic trajectory.

The report highlights the spike in government’s debt which has touched 50.6% of the GDP at the end of Q3FY23. This is higher than the burden of 42.8% in FY20 and close to the peak of 52.6% in Q1FY22. As the economy defies global challenges and grows beyond pre-pandemic rates, the trajectory of debt leverage becomes more noticeable.

Furthermore, FDI inflows to the country have been affected by inflationary pressures and tighter monetary policies abroad. While gross FDI touched a record high of $84.8 billion in FY22, inflows moderated by 16% in FY23 compared with the previous year.

In the upcoming months, policymakers and the government need to closely monitor FDI data and implement measures to facilitate inflows. The report also suggests focusing on capacity creation, resolving last-mile infrastructure issues, and addressing labour availability concerns in the coming months and years.

Despite unprecedented global challenges, India has maintained remarkable growth, thanks to the commendable efforts of the central bank and policymakers. They have dealt with balance sheet troubles in the Indian banking and non-financial corporate sectors. The government rightly emphasises that this is not a time for complacency but a time to ensure that hard work pays off in the months ahead, allowing India to sustain its growth trajectory.

Exit mobile version