According to a report by Reuters, the Bank’s chief economist Indermit Gill put a gloomy spin on the June forecasts, saying 2023 would mark one of the slowest growth years for advanced economies in the last five decades. This makes India’s projected number look even brighter.
Here are a few more forecasts for India — 5.9% by the Inter national Monetary Fund (IMF) and 6.5% by the Reserve Bank of India (RBI). Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, also puts the figure at 6.5%. Speaking to ET, he says forecasters tend to underestimate India’s growth numbers. “In 2022-23, outside government, predictions were generally reluctant to cross that mental threshold of 7%. It was almost as if that was a price point for a product, with 6.9% preferred to 7.1%,” he says. Eventually, the growth rate of India’s gross domestic product (GDP) for 2022-23 was 7.2% — higher than what most forecasters had estimated. Debroy, however, concedes that India should aspire to grow between 7% and 7.5% in the next three to five years.
What could be the most probable growth number for the current fiscal year? Despite headwinds — including a slow recovery in domestic manufacturing, uncertain geopolitics and a looming threat of El Nino that can impact monsoon — the Indian economy may grow at about 6.5% in FY24. This is short of an aspirational growth rate of 7% or more. Not so long ago, India had aspired to achieve a double-digit growth rate — a reasonable target when the nation was clocking 8.2% in 2016-17 and 7.2% in 2017-18 before going south. In 2019-20, a year largely unscathed by the Covid pandemic, the rate of India’s GDP g rowth was a low 3.7%.
According to the chief policy advisor of EY India, DK Srivastava , India’ s GDP growth in FY24 is likely to be 6.2-6.3%. “Our assessment is that the actual outcome would depend on the severity of the El Nino impact on monsoon and, therefore, agricultural output. There is a strong likelihood that this adverse impact would be moderate this year due to the neutralisation of El Nino by the Indian Ocean dipole,” he says.
El Nino is a climatic pattern related to an abnormal warming of surface waters in the equatorial Pacific Ocean. The government forecaster, the India Meteorological Department (IMD), says this could affect the monsoon, particularly its second spell in August and September. Dipole, meanwhile, refers to the sea surface temperatures of the Indian Ocean. Monsoon is an important event in India’s economic calendar as half of the net sown area in the country is still rain-fed. The significance has to be underlined as India’s gross value added (GVA) growth rate in agriculture and allied sectors was positive throughout the Covid – 1 9 period (4.1% in 2020-21, 3.5% in 2021-22 and 4% in 2022-23) when most other sectors tumbled. (GVA is GDP plus subsidies minus taxes.) Any sharp drop in agri growth will have a negative impact on the GDP number. CAN THIS BE SUSTAINED?
There’s one more concern. Can India achieve a robust growth rate on a sustained basis since the pandemic aftershocks are waning? According to a recent EY analysis, India could look towards a multi-year growth cycle “with a pickup in the private investment cycle for manufacturing and infrastructure” despite risks of geopolitical fragmentation and uncertainties in the global economy.
EY’s Srivastava says some sectors like manufacturing have not yet fully recovered. “Manufacturing contracted in FY20, prior to Covid. The compound annual growth rate for this sector from FY19 to FY23 is a little less than 3%,” he says, adding that the sector requires policy scaffolding to enhance total output and create jobs. “That will push the Indian economy closer to its potential growth rate of 7%,” he adds.
Rumki Majumdar, an economist in Deloitte India, says unlike agriculture, sectors like manufacturing and construction have witnessed inconsistent recovery. “We expect growth in 2023-24 to be between 6% and 6.5%. GDP growth will be driven by a likely pick-up in private investments kick-starting the vir- tuous circle of job creation, income and productivity,” she says, adding that inflation, however, could remain above the RBI’s comfort zone.
“An El Nino-led, less-than-normal monsoon can bring about a severe stress on the agriculture sector and rural demand, slowing down consumption growth, ” says Majumdar. “It will also put pressure on food inflation.” The RBI, which projects a 6.5% growth rate, is primarily banking on the liberal capital expenditure (capex) announced in the last Union budget. Capital investment outlay was increased by 33% to Rs 10 lakh crore. The interest-free loan of Rs 1.3 lakh crore to states is also conditional on the fact that the amount has to be spent in the current fiscal year itself.
“The crowding-in effects of sustained increase in government capex over recent years is expected to spur higher private investment in 2023-24,” says the central bank’s annual report for 2022-23. The future outlook in the medium term may depend on whether the Union government will be able to sustain its high capex story.
The RBI raised the repo rate by 250 bps between May 2022 and February 2023 with a single objective — taming inflation, a critical factor in the estimation of future growth. In the last fiscal year, headline inflation averaged 6.7%, 115 bps higher than a year ago. Despite elevated food, energy and commodity prices both at home and globally, plus multiple other challenges such as aggressive monetary policy tightening and formidable geoeconomic fragmentation, the Indian economy exhibited resilience in 2022-23, the RBI report highlights.
As we are now in the third month of the current fiscal year, what is apparent is that some of these past challenges have weakened but haven’t gone away. The global scenario, particularly that of the advanced economies, is still bleak – and that may impact India’s exports as well as inflows of foreign direct investment. Even against this backdrop, several economists estimate, India can achieve a decent 6.5% GDP growth rate for the year unless a new monster emerges and plays havoc with these calculations.
