India’s economy in 2023: Hope, challenges, and a lot of uncertainty

Last Updated28/12/2022

2022 began with hopes of a rebound in the global economy as pandemic fears receded, but the optimism was dashed early as Russia’s invasion of Ukraine triggered the biggest land conflict in Europe since WW II.
Also, China’s uncertain post-pandemic path, and the prospect of a central bank-engineered downturn — a global recession seems imminent.

Average global growth: ~ 3% in 2022
Highest global inflation in 50 years: most aggressive monetary tightening cycle in ~ 40 years, strongest US dollar in 20 years, & weakest Chinese growth in >45 years.
Projected global growth: to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023.
Global food, energy and other commodity prices: eased moderately over the past few months
Global inflation forecast: to decline from 8.8% in 2022 to 6.5% in 2023 to 4.1% by 2024.

Widening difference between interest rates in US & India: when Fed raises policy rates, the latter becomes less attractive for the currency carry trade;
A churn in emerging market equities: due to higher returns in US debt markets, tempering foreign investor enthusiasm;
Impact on currency markets: by the outflow of funds to the US; sustained rate hikes would also mean a lower impetus to growth in the US, which could be bad news for global growth.

Near-term growth outlook supported by domestic drivers: reflected in the buoyant trends in high frequency indicators.
Moderated headline consumer-level inflation: by nearly a percentage point to 5.9% in November, driven by a fall in vegetables prices.
Mending twin balance sheet problem: a significant deleveraging over the last five years, with the corporate debt-to-GDP at its lowest in nearly a decade and a half, and bank books have shed much of the legacy bad loans.
Waning input cost pressures & surging corporate sales: heralding the beginning of an upturn in the capex cycle contributing to a reboot of India’s growth momentum.
PLI scheme: offering an impetus to manufacturing & fresh investments are expected in renewables, electric vehicles, and battery tech.
Bank credit: growing in double digits for eight months now, reflecting in part an uptick in investment appetite.
Beijing vacating low-skilled, unskilled labor intensive manufacturing: like textiles, shoes, leather etc, giving India a chance to fill part of this vacuum.
Uptick in term-lending to non-corporates: a sign that implies that smaller firms may be seeking funds beyond their immediate working capital needs.
Robust collections in both direct taxes & GST: reflecting sustained recovery of corporate sector; states showing decline in their deficits & borrowings.
Robust outlook for rabi: showing good prospects for wheat production with higher support prices, adequate reservoir levels, & climatic factors.

External uncertainties: Ukraine war, energy-linked downturn in EU etc shows that global economy is on downturn thereby impacting India.
Higher protectionism: greater fervour for de-globalisation & economic balkanisation - a major dampener for emerging economies.
Wobbly manufacturing in India: Factory output slumped to a 26-month low in Oct - led to a downward revision of India’s growth projections.
Private consumption growing as manufacturing is shrinking: leading to a sharp increase in imports during the last six months.
Minor uptick in capacity utilisation: continues to hover around the 75% mark.
Continuing distress among the MSME firms: bigger companies are doing far better than the smaller firms.
Weak capital expenditure of the states: Investments by states typically tend to have a higher multiplier effect.
Managing inflation expectations: a challenge going forward given that the RBI has been behind the curve on tackling prices.
Successive supply shocks: a concern going into 2023.
India’s significant dependence on imported energy: at 4% of the country’s GDP shows up on the balance of payments side.
High current account deficit: of > 3% is projected for FY23.
Buoyancy in farm output & contracted rural wages: due to a continued labour oversupply in rural areas and depressing aggregate household consumption.