The external sector may challenge India’s growth outlook for 2023-24, the Finance Ministry said in a report released Thursday. The ministry flagged a number of factors that could constrain the pace of growth: volatility in global financial systems, sharp price corrections in global stock markets, the impact of El-Nino, and modest trade activity and FDI inflows owing to frail global demand.
The European Union’s (EU) introduction of the Carbon Border Adjustment Mechanism (CBAM), for which reporting of carbon content in exports to the EU would be required to begin from October 1, 2023, is one of the impending downside risks to India’s exports, it said in the Annual Economic Review for 2022-23.
India’s domestic demand, however, is strong and high-frequency indicators indicate a healthy picture of the state of the economy, the ministry said, adding that urban demand conditions remain resilient, with higher growth in auto sales, fuel consumption and UPI transactions. Rural demand is also on its path to recovery with robust growth in two- and three-wheeler sales, it said.
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The government and the Reserve Bank of India expect India to grow 6.5 per cent in FY24.
The challenge from the external sector comes as net exports did not work as well for the economy in the second half of 2022-23 as they did in the first half. Also, high import prices and high import demand amid weak external demand have resulted in negative net exports in real terms that have shown a sharp downward trajectory and prevented India’s real Gross Domestic Product (GDP) growth from crossing the pre-pandemic trend trajectory, it said.
Noting that the higher annual growth in FY23 was driven mainly by better-than-expected growth in the January-March quarter, the ministry, however, said that consumption and investment demand have surpassed the pre-pandemic trend trajectory.
“Enabled by the release of pent-up demand, real Private Final Consumption Expenditure (PFCE) has surpassed the pre-pandemic trend trajectory. Similarly, a large step-up in public sector capex over the last three years and a favourable credit situation in the country have contributed to real Gross Fixed Capital Formation (GFCF), also surpassing the pre-pandemic trend trajectory,” it said.
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“However, the faster growth in post-pandemic economic activity in the Indian economy and high import prices have kept the import demand elevated. As a result, the negative net exports in real terms have shown a sharp post-pandemic downward trend trajectory as compared to a slightly upward pre-pandemic trend trajectory. This has prevented the post-pandemic real GDP trend line from crossing the pre-pandemic trend trajectory, although it is very near to doing so. Given the decline in prices of India’s import basket and a sustained surge in service exports, the net exports gap is expected to become smaller sooner than earlier expected. This will enable real GDP to surpass its pre-pandemic trend trajectory in the near future,” the report added.
India’s GDP had clocked a higher-than-expected growth rate of 6.1 per cent in January-March 2023, in turn pushing up the growth estimate for 2022-23 to 7.2 per cent, as per data released by the National Statistical Office (NSO) on May 31. In February, NSO had estimated GDP growth for FY23 at 7.0 per cent.
The report said that India’s macroeconomic management has been stellar despite unprecedented global challenges in the last few years coming on top of balance sheet troubles in Indian banking and non-financial corporate sectors. For inflation as a challenge, the report said India’s inflation breached the target to a lesser extent as compared with other emerging economies and advanced economies, adding that the RBI did not have to increase the policy rates as much as central banks of other countries did.
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“Investments in supply-side infrastructure raise the possibility that India can enjoy sustained economic growth longer than it has been able to in several decades. Strong balance sheets and digital advancements could lead to better credit decisions allowing India’s financial cycle to sustain for longer periods before encountering the challenge of bad debts. Thus, India appears poised to sustain its growth in a more durable way than before. Nonetheless, it is no time to rest on laurels nor risk diluting the painstakingly and consciously achieved economic stability. If we are patient, the rising tide will lift all boats as it has begun to,” it said.
India, however, needs to watch FDI data closely and take measures to facilitate inflows after recording a decline in net FDI by 27.4 per cent in FY23. Measures would also be required to facilitate large capacity creation, last-mile infrastructure issues and labour availability, the ministry said. Foreign direct investment flows may get impacted by political distance more than geographical distance, the report said, citing International Monetary Fund (IMF) research, adding that this policy space may need India’s increasing attention in the coming months and years.