India's resilient Economy

The year 2023 was kinder in terms of economy as the worst fears in the initial days of economic slowdown have not materialised yet. Despite a fresh geopolitical flashpoint in West Asia and a few bank collapses in the West Indian stock markets ended the year at record highs. The economy has delivered positive surprises, with ₹1.6 lakh crore becoming the new normal for monthly GST collections and GDP growth hitting 7.7% between April and September on top of a 7.2% rise in 2022-23. As we stand on the threshold of the New Year, several key factors will influence India''s economic trajectory and policy decisions:

Growth Projections and Resilience:

  • Past Data Trends: Historical patterns indicate a consistent growth momentum throughout the fiscal year, suggesting a probable annual growth rate surpassing 7% for the current fiscal.
  • Agricultural Sector Resilience: India has made significant strides in diversifying its crop patterns. This strategy mitigates risks associated with monsoon failures or erratic rainfall, as different crops respond differently to weather variations. Expanding irrigation facilities, including the implementation of water conservation methods like drip irrigation, has reduced dependency on rainfall for agriculture, enhancing productivity. 
    • Improved forecasting capabilities and dissemination of weather information have empowered farmers to make informed decisions, minimizing losses due to adverse weather conditions.
  • Reduced Dependency on Oil: India''s shift towards renewable energy sources and less energy-intensive sectors, such as services and technology, has reduced its overall dependence on oil. The decreasing oil intensity of the GDP has allowed India to maintain a current account deficit below 2% of GDP, decoupling it from global oil price fluctuations.
  • Political Stability: Recent elections in India have shown clear majority mandates, reducing political uncertainty and fostering a stable environment for policymaking and investments. This trend is indicative of stable governance and policies, attracting both domestic and foreign investments.
  • Macroeconomic Stability and Financial Sector Reforms: Reforms led by the RBI and the government have addressed the banking sector''s legacy issues, resulting in improved credit growth and stability. Measures to stabilize the non-banking financial sector post-2019 crisis have contributed to overall financial stability.

Challenges Ahead:

  • Demographic Changes: India faces challenges associated with an ageing population that might impact labor force dynamics and healthcare requirements.
  • Climate-Related Concerns: Managing climate change effects on agriculture and other sectors remains crucial.
  • Technology Disruption: Adaptation to technological advancements affecting labor-intensive industries needs to be addressed.
  • Global Debt Dynamics: The global economic landscape''s heavily indebted nature poses challenges, necessitating prudent financial management.

Key Things to Watch Out For:

  • Future Trajectory: A growth range of 6.5% to 7.5%, centered around 7%, seems a reasonable baseline for the upcoming year barring unforeseen simultaneous adverse shocks.
  • GDP Growth: With continued resilience in GDP growth India has showcased unexpected resilience despite global uncertainties and geopolitical tensions. The GDP growth rate at 7.7% between April and September 2023, alongside positive surprises in GST collections, indicates a robust economic performance.
  • Global Economic Conditions: Geopolitical conflicts, like those in Ukraine and West Asia, have contributed to elevated oil prices and inflation concerns. Ongoing geopolitical disruptions and potential new flashpoints could influence trade relations and economic stability. Events such as attacks on shipping lines might pose challenges to trade.
  • Global Demand and Exports: How global demand affects India''s goods and IT-led services exports, especially considering the ongoing challenges faced by developed economies can be a concern. India''s export sector, especially goods and IT-led services, faces challenges due to sluggish global demand. Recent incidents impacting shipping lines in Red Sea corridors raise concerns about disruptions in trade.
  • Interest Rates: Anticipations surround the RBI''s probable interest rate cuts in the latter half of the year, aligning with global cues, especially the U.S. Federal Reserve''s stance on rate adjustments. Hence monitoring central bank policies and potential rate cuts, both by the RBI and other global central banks, which might influence demand for Indian goods and services will be key to watch.

Expected Policy and Political Economy Front:

  • Budgetary Announcements: The interim Budget scheduled for February 1 might not include major announcements due to the upcoming Lok Sabha elections.  However, the full Budget anticipated around July could introduce substantial reforms and policies. 
  • Private Investment and Fiscal Consolidation: The government aims to assess the widespread rebound in private investment to balance public spending and fiscal consolidation efforts. Key sectors like steel, cement, and auto might indicate this economic shift.
  • Global Political Landscape: The impending elections in various countries, including India, the European Union, the U.S., and Russia, will potentially reshape global political landscapes, potentially impacting trade policies and economic engagements.
  • Potential Rate Cuts: While the RBI might consider interest rate cuts in the latter half of the year, global cues, especially the U.S. Federal Reserve''s stance on rate hikes, might influence other central banks, potentially leading to rate cuts worldwide.
  • Petrol and Diesel Prices, GST Rates: Speculations are rife regarding changes in petrol and diesel prices, which have remained unchanged for an extended period which was evident as recently the government has announced a massive cut in petrol and diesel prices. Additionally, streamlining the complex GST rates might be a point of contention and a potential election promise.
  • Inflation Concerns: While inflation seems relatively controlled, there are worries about food prices due to factors like El Niño affecting crop yields. This might impact household budgets and consumption patterns, particularly in the rural sector. Adverse weather conditions are the major factor impacting crop yields which further strain household budgets.
  • Consumption Trends: Disparities are observed in consumption trends, with high-end goods and services witnessing demand while lower-priced segments face challenges. Curbs on retail loans and weak hiring in certain sectors might also affect consumption patterns.

The outlook for India''s economy in the coming year is promising yet complex, with a mix of global uncertainties and domestic challenges. Monitoring global economic conditions, inflationary pressures, policy decisions, and their repercussions on various sectors will be crucial in sustaining and enhancing India''s growth prospects amidst the evolving global landscape, and their implications on various sectors to sustain and enhance growth prospects.

PYQ: Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC 2019)

 



POSTED ON 01-01-2024 BY ADMIN
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