By K Raveendran
It is election year for the Indian economy and the footnote to the robust economic performance would pinpoint the risks of freebies and subsidy politics impacting growth. The pressures are expected to pinch hard from mid-year onwards as the drivers of growth would shift gears down by at least a couple of levels. Increased allocation for food support programmes, cooking gas subsidy and rural employment plans has already been indicated.
Yet, the fact that India is set to post the highest growth rate among the major economies of the world cannot be lost sight of. Among the 13 large economies in Goldman Sachs Research’s global outlook for 2024, India’s projected growth rate is the highest at 6.2 percent, with China coming in second at 4.8 percent. The world has been keenly watching the post-pandemic recovery by the Chinese economy, which has, however, not lived up to expectations. So, India’s prospects must come as cause for celebration for the managers of the world economy.
While capital expenditure on the government account will surely slow down, Sachs economists have expressed the confidence that the conditions are ripe for private investment to accelerate. The reason they cite is that Indian companies are well-positioned to do that even as bank balance sheets are well-capitalised and manufacturing balance sheets deleverage.
Assocham said the other day that on the back of strong consumer demand it was expecting a pick-up in investment across sectors such as construction, hospitality and infrastructure including railways and aviation. It said financials, construction, hotels, aviation, automobile and other manufacturing areas like electronics are on a strong pitch to further improve performance in the coming year and the trajectory is being helped by the low crude oil prices, keeping inflation in check with a big positive on raw material cost.
And this is all the more cheerful as the latest data from the Ministry of Commerce and Industry showed that there has been a decline in the growth number for eight key infrastructure sectors in November, slowing down to 7.8 percent compared to 12.1 percent a month before. The eight core industries included cement, coal, crude oil, electricity, fertilizers, natural gas, refinery products and steel. These industries also form 40.27 percent of the weight of items included in the Index of Industrial Production (IIP).
The IMF has been highly optimistic about the Indian economy’s performance, both in 2023 and outlook for the New Year. In the Fund’s Article IV consultation with India, it appreciated the robust growth over the past year, with headline inflation remaining moderate, although it remains volatile. Employment has surpassed the pre-pandemic level and, while the informal sector continues to dominate, formalization has progressed.
According to the IMF, growth is expected to remain strong, supported by macroeconomic and financial stability. Real GDP is projected to grow at 6.3 percent in the 2023-24 and ’24-25 financial years. Headline inflation is expected to gradually decline to the target although it remains volatile due to food price shocks. Similarly, the current account deficit is expected to improve to 1.8 percent of GDP as a result of resilient services exports and, to a lesser extent, lower oil import costs. Going forward, it sees the country’s foundational digital public infrastructure and a strong government infrastructure programme sustaining growth. India has potential for even higher growth, with greater contributions from labour and human capital, if comprehensive reforms are implemented, it noted.
The Fund has welcomed that the financial sector remains stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets, and adequate capital and liquidity buffers. But it broadly called for continued supervision and the use of prudential tools to preserve financial stability and manage emerging vulnerabilities, including rapid growth in unsecured personal loans. Further strengthening of regulatory and supervisory standards and encouraged public banks to continue building capital buffers.
On the downside, however, the IMF has spoken about risks as well. A sharp global growth slowdown in the near term would affect India through trade and financial channels. Similarly, further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures. Domestically, weather shocks could reignite inflationary pressures and prompt further food export restrictions. On the upside, stronger than expected consumer demand and private investment would raise growth. Further liberalization of foreign investment could increase India’s role in global value chains, boosting exports. Implementation of labour market reforms could raise employment and growth. (IPA
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