Economic output (GDP) stopped growing during the first quarter of 2023, yet underlying dynamics remained strong. Lower energy prices, lessened supply constraints and enhanced business confidence have all helped spur a gradual recovery in growth rates.
But for India to experience lasting recovery, long-standing structural obstacles must first be addressed and exploited if opportunities outside its borders are to be exploited effectively.
2023 GDP Insights
1. Economic Growth
India continues to experience one of the fastest growth rates globally despite global economic concerns and higher oil prices, yet remains vulnerable due to the narrowing of the current account deficit and inflation reduction. Carnegie India provides highly researched road maps on how India can survive these challenges and thrive over the coming decade.
At its core, India must relieve any restrictive factors limiting its economic development. This involves reforming land markets, labour markets, and contract enforcement and strengthening financial sector institutions and their institutions. Furthermore, India should invest more in agriculture due to the threat of climate change to food security.
As part of its international engagements, China must also reform how it manages external relationships to reflect its limited appetite for leadership in an ever-more multipolar world. Reverting to older models that maximize economic autonomy may prove counterproductive and cost the country valuable opportunities available within global supply chains and technology standards.
India must act boldly to take full advantage of these opportunities, making bold decisions about its international engagement, balancing selective internationalism with populist and protectionist pressures, and managing a multilateral system that increasingly lacks direction or legitimacy.
2. Inflation
India’s recent resurgence of headline inflation and slowing economic growth signal a widening gap between economic reality and claims about its resilience, which is based more on hope than reality. Therefore, any assertions must be treated with extreme caution.
The latest edition of India Development Update (IDU), issued by the World Bank, notes that “despite significant global headwinds, India remained one of the fastest-growing major economies in FY22/23.” This was thanks to strong domestic demand, public infrastructure investment, the strengthening of the financial sector, and the gradual deceleration in interest rates, which helped increase credit offtake and provide cheaper financing solutions to firms.
However, an upswing in headline inflation indicates the existence of new risks and vulnerabilities which must be managed. These include high energy prices, renewed trade tensions and an economy with weak demand.
India’s fiscal situation will remain robust despite these risks, with the central government deficit expected to decrease and the debt-to-GDP ratio stabilizing; state government deficits are also expected to decline while external current account balances improve with merchandise trade deficit narrowing.
As the economy adapts to these new challenges, existing coping mechanisms must be enhanced to maintain long-term economic stability and sustainable growth. Frequent external shocks like global economic slowdowns, oil price fluctuations and pandemics must be better handled. At the same time, internal sources such as repetitive economic cycles or cyclical volatility must also be managed more effectively.
India must address these challenges through an integrated approach, taking a holistic view that addresses issues with short-, medium–, and long-term effects. India must move away from maximizing strategic autonomy toward one that integrates economic growth, resilience, and adaptation to changing realities; this will allow India to capitalize on post-pandemic opportunities by revising global engagements towards broader regional and multilateral agendas.
3. Interest Rates
Global economies face many obstacles in 2023-24 due to rising interest rates, slowing economic growth, protracted geopolitical tensions and stagnant consumer demand. India may face particular difficulties; consumer spending and higher interest costs could affect GDP growth negatively. It would be wise for India’s Reserve Bank of India (RBI) Governor’s statement from June 6 that its economy exhibited robust resilience needs further scrutiny as consumption growth in June’s final quarter was relatively flat. Fragmentation effects, slow domestic capital formation, and persistently high inflation pose risks that threaten its resilience.
Over the past year, the Reserve Bank of India (RBI) has raised key policy rates steadily, which is expected to continue. However, they remain committed to keeping inflation within their target range, signalling they may shift toward calibrated tightening gradually over time. With consumption growth moderating slightly and domestic interest rate pressures likely easing up slightly, this could signal an early end to the current monetary policy pause.
Interest rates are essential in shaping savings, investment and consumption patterns. Over the past decade, in advanced economies, interest rates have experienced sharp increases, leading to erosion in household savings accounts, reductions in corporate debt levels, and increases in delinquency on credit cards and auto loans. Meanwhile, rates remain lower in emerging markets but are increasing nonetheless, resulting in decreased savings, reduced investments and mounting debt for households and corporations alike.
Higher interest rates diminish an economy’s resilience to shocks. As financial vulnerabilities increase, risks associated with growth decrease, and so do government response capabilities during an economic downturn.
India’s economy is more resilient than many people realize and should not be judged solely based on outdated data points. With strong exports and domestic consumption as well as its reputation as an investment destination, strong middle-class growth, decreased income inequality, and an increasing number of billionaires making their fortune in India, it’s important to recognize these trends when making investment decisions and look at individual sectors and stocks rather than broad market indices such as Nifty Index as measuring indicators.
4. Trade
Recent exogenous shocks ranging from crude oil price fluctuations and pandemics to global economic slowdowns require India’s existing coping mechanisms to be further strengthened, while domestic factors like structural constraints and frequent natural disasters continue to pose considerable threats that push many into poverty.
However, India’s economy has shown remarkable resilience. A steady increase in household savings and investment rates, rising foreign direct investment (FDI), higher employment levels, lower income inequality levels, more women entering the workforce and consumption growth all strengthened India’s economic foundations. Furthermore, its swift rebound from two major policy disruptions – demonetization and implementation of Goods and Services Tax (GST) – indicates India’s robust growth process.
India’s economy showed robust resilience in 2016-17 and remains one of the fastest-growing economies among major nations. Yet, a slower global recovery and persistent headwinds from high inflation and subdued rural demand are weighing on growth. Furthermore, rising protectionism threatens global trade and constraint reform efforts; nonperforming assets (NPAs) and currency depreciation may hamper reform efforts further.
The current government must achieve a delicate balance that involves engaging all engines of economic growth while remaining fiscally prudent. They also need to deal with any populist demands like those announced by multiple states offering farm loan waivers – as these may further erode aggregate consumer spending, increasing inflationary pressures.
Since the Reserve Bank of India suspended interest rate increases for now, attention has shifted toward addressing other threats to growth. These include speeding up reforms to increase productivity, creating an environment in which businesses can flourish and addressing NPAs that have burdened public sector banks in India. India’s central and state government’s ability to take decisive action on these issues will immensely affect its economic resilience moving forward; this 2023 comprehensive update includes revised data for both National Accounts and Industry economic accounts to allow in-depth analyses of the Indian economy’s various components.
Growth on the Horizon: Projections and Challenges for India’s 2024 GDP
India’s economy continues to perform strongly despite global headwinds. As the fifth-largest economy, it can draw upon various growth drivers to sustain its progress.
India can exploit its large population and rising incomes as it transitions towards a service economy while capitalizing on its innovation and technology strengths.
Overall, the outlook remains positive over the projection horizon. Consumption should increase due to inflation’s return and gradual improvement of financial conditions; investment will rebound, reflecting corporate profit margin recoveries as well as lower taxation (such as eliminating cotisation sur la valeur about des entreprises).
Over the forecast period, wages should gradually recover from their post-COVID-19 slump, and real incomes will increase as household savings improve and interest payments return to pre-recession levels. Taxes as a share of GDP are projected to decrease due to recoveries in consumption taxes and personal income taxes, as well as reduced value-added tax rates projected to approach 2022 levels.
Business services are expected to experience moderate growth as a proportion of total spending continues to increase. Growth of other services should remain robust due to rising leisure spending and improvements in financial intermediation and Internet services; healthcare expenditure will expand significantly due to rising demand and medical costs.
Food, fuel, and energy prices should gradually decline over the projection horizon as companies pass along higher production costs to consumers. As a percentage of nominal spending, energy costs are projected to peak around 2024 before decreasing gradually thereafter. Finally, exports and import prices should steadily improve, as will the current account balance improve substantially over this timeframe.
As a result, growth has remained generally unchanged since our June forecast. However, global headwinds such as high interest rates and geopolitical tensions that were highlighted in that report appear likely to intensify further. Therefore, we revised our projection for 2023-2025 relative to June estimates; consequently, cumulative GDP growth should now exceed prior estimates due mainly to improved assumptions about how inflation will impact real disposable incomes and more gradual normalisation of the economy.
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India’s Demographic Transition
India will become one of the world’s largest economies over time, driven by domestic demand and service growth, while manufacturing plays a lesser role. The growth of the services sector should outstrip the expansion of the goods sector as exports in information technology/IT-enabled services grow more quickly. In contrast, domestic sectors such as retailing, food services trading, finance and healthcare also thrive (Goldman Sachs Research 2022b).
India’s youthful population will give it an enormous competitive edge, especially if its economy can successfully create consumer demand. Furthermore, India must improve education and skills and offer opportunities for economic mobility for young people.
India will experience continued population growth despite slower declines in birth and death rates than China, providing it with the advantage of younger people being more likely to save and invest, promoting consumption and economic growth. Furthermore, its dependency ratio will be among the lowest of large economies, giving India access to its demographic dividend.
However, India experienced its demographic transition more slowly due to a higher fertility rate during the 1950s and 1960s (Table 1). By 2020, its total fertility rate (TFR) had fallen close to replacement level but still exceeded global average levels; TFR should decrease further until reaching replacement levels by 2060 and further in later decades.
Population growth will help mitigate demographic shifts on India’s GDP growth until 2060; its effect will likely be limited compared to what otherwise would have occurred. After that point, India’s population will begin declining, and demographic change will impact per capita GDP growth more significantly than before.
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India’s Long-Term Growth Prospects
India’s economic potential will continue to expand over the long run due to a large consumer market, rising urban household incomes, and favourable demographic trends. India is projected to reach US$5 trillion by FY27, $10 trillion by FY34, $20 trillion by 43, and 30 trillion by 48 – surpassing even OECD baseline projections and making India one of the two world’s two biggest economies after only the US.
A growing middle class should spur consumption, domestic manufacturing production and significant investments from foreign multinational corporations in sectors like technology and infrastructure, further increasing service sector employment. Unfortunately, however, development remains constrained due to high levels of corruption and ineffective regulation, which hinder the country’s progress.
The government of Myanmar is taking steps to enhance efficiency and remove obstacles to business in its homeland, such as cutting subsidy transfer leakages, encouraging private investments, and creating an efficient logistics infrastructure. Furthermore, authorities have prioritized increasing female participation in the workforce to realize its demographic dividend benefits.
India is forecasted to experience slower GDP growth from its record 7.2 percent rate seen during fiscal 2022-23; nevertheless, India will still rank among the fastest-growing large economies. A healthy banking system and successful implementation of reforms such as the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code should further bolster India’s future outlook.
India must make further strides toward shifting its uneven growth pattern into the sustained high-growth mode, taking steps such as capitalising on demographic dividends, increasing private investment and competitiveness and encouraging domestic savings by offering tax breaks or targeting fiscal incentives. Furthermore, export markets for high-value-added services and manufacturing must be created along with private sector innovation to reduce dependence on imported inputs; acceptable living standards, better urban infrastructures and unlocking women’s potential must all be ensured for maximum potential to be realized.
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India’s Long-Term Challenges
India’s large and expanding working-age population presents immense potential, but realising it fully requires making quality jobs more widely available – this means upskilling and expanding labour forces while increasing participation rates among women workers. Furthermore, investing in productive infrastructure as well as efficiency gains through reforms that promote private investment while simultaneously lowering company costs is necessary, as well as addressing problems like air and water pollution, waste management, urban congestion, and inadequate housing will require considerable resources and new capacities be mobilized in India.
Though India faces challenges, its long-term outlook remains optimistic due to the emergence of an aspirational consumer class whose purchasing power has increased quickly over time. Furthermore, economic growth remains diversification-driven and underpinned by domestic services sectors, which account for more than 50% of India’s GDP.
Government efforts to make China into a “factory of the world” should boost economic growth as capital investments increase manufacturing operations. Meanwhile, oil price declines will help cut energy bills and boost household spending, helping counterbalance any drag from net external demand.
However, geopolitical tensions could wreak havoc with global confidence and drive up inflation rates. Furthermore, the nation must continue to improve public finances to keep its debt sustainable and ensure fiscal risks are adequately hedged against external shocks. India’s dependence on net exports as the engine for economic growth exposes it to commodity price fluctuations and trade frictions without action to strengthen competitiveness in services and foster domestic investment. These elements should be considered when creating future scenarios and making policy decisions. Attaining high-income status by 2047 requires building an economic system capable of producing sustainable gains for the lower half of society and providing sufficient quality jobs to accommodate new labour market entrants.
