India Hits 8.2%
Growth in 2023-24 with Real Estate and Construction Boom
·
World
Bank Report on India’s Trade Opportunities in a Changing Global Context
·
In India,
economic growth increased from 7.0 percent in FY22/23 (April 2022-March 2023)
to 8.2 percent y-o-y in FY23/24.
·
Youth
unemployment remained high at 16.5 percent.
·
India's current account deficit (CAD) narrowed
significantly in FY23/24, from 2.0 percent in the previous fiscal year to 0.7
percent of GDP.
·
Foreign Portfolio Investment (FPIs) inflows
were significant, offsetting a moderation in Foreign Direct Investment (FDI).
·
India's trade in goods and services has
decreased as a percentage of GDP and India’s participation in GVCs has fallen.
·
Exports are also relatively concentrated in
goods and services that tend not to be labor-intensive. As a result, trade-jobs
linkages are not fully exploited.
·
Key factor behind this decline is the increase
in import tariffs on key intermediary inputs, which has raised production costs
·
India must diversify its export basket and
enter new markets. Participating more actively in GVCs is crucial for doing so,
and it would also boost overall competitiveness in the domestic economy and
attract greater foreign investment.
·
A
resurgence in protectionist measures, including increased tariff and non-tariff
barriers, is restricting India's trade openness.
· India does not participate in mega trade blocs, such as the Regional Comprehensive Economic Partnership (RCEP), despite potential benefits from broader trade cooperation.
Summary
The
global economy has been resilient but remains weak
Global
growth softened to 2.6 percent year-on-year (y-o-y) in 20231 but was higher
than previously expected in the October 2023 India Development Update (IDU).
Several major economies outperformed expectations, including the United States
and Saudi Arabia. Inflationary pressures abated somewhat, and there was a
notable downturn in global commodity prices. However, monetary policy remained
relatively restrictive and geopolitical tensions persisted. Global growth is
estimated to remain muted at 2.6 percent in 2024, significantly below pre-COVID
levels.
India
remained the fastest growing major economy
In India, economic growth increased from 7.0 percent in
FY22/23 (April 2022-March 2023) to 8.2 percent y-o-y in FY23/24. On the
demand side, growth was primarily driven by a significant expansion of
investment, in particular public infrastructure investment and private
investment in real estate. On the supply side, it was supported by a rebound in
the manufacturing sector, benefitting from a buoyant construction sector and
low input costs.
Rapid
growth was accompanied by improvement in the urban labor market
The
urban labor market improved between January and December 2023, particularly for
women and youth. In Q3 FY23/24, the urban unemployment rate declined to its
lowest levels since Q2 FY17/18, although youth
unemployment remained high at 16.5 percent. Meanwhile, the urban worker
population, as a share of the total urban population, increased for all groups
(male, female and youth), reflecting the economy's growing capacity to absorb
labor in the post-pandemic period.
The
RBI maintained its policy rate
Inflation
remained within the Reserve Bank of India’s (RBI) tolerance range throughout
the fiscal year, except for a temporary spike in July-August 2023 driven by an
uptick in food prices. Headline inflation declined steadily from 6.7 percent on
average in FY22/23 to 5.4 percent in FY23/24. It moderated to 3.5 percent in
July 2024. Meanwhile, core inflation fell to a record low of 3.0 percent in May
2024, before picking up slightly to 3.4 percent in July. To keep inflation
within the tolerance range while enabling growth, the Monetary Policy Committee
(MPC) of the RBI maintained its “withdrawal of accommodation” stance and kept
the policy rate unchanged at 6.5 percent in its August 2024 meeting.
The
current account deficit narrowed in FY23/24
The
general government fiscal deficit narrowed in FY23/24, despite an increase in
capital expenditure
The
general government fiscal deficit declined to 8.5 percent of GDP in FY23/24.
The central government's fiscal deficit is estimated to have narrowed to 5.6
percent of GDP, down from 6.4 percent in the previous year. Revenue growth
drove the improvement, particularly personal and corporate income taxes. While
capital spending by the center surged by 28 percent, current expenditure grew
by only 1.2 percent (below nominal GDP growth), helping to lower overall
expenditure as a share of GDP. The states’ combined fiscal deficit is estimated
to have expanded slightly in FY23/24 from FY22/23 at 2.9 percent of GDP, driven
by increased capital expenditure. Public debt increased to 83.9 percent of GDP
in FY23/24, from 82.5 percent in FY22/23, on account of the relatively low
nominal rate of growth.
The
medium-term economic outlook is positive, despite global headwinds
Growth
is expected to remain strong at 7.0 percent in FY24/25, despite a subdued
external environment, and the dissipation of post-pandemic rebound effects.
External risks to the outlook are significant. In particular, geopolitical
tensions could put pressure on commodity prices and critical supply chains, and
resurgent inflation could still keep global interest rates “higher for longer”.
These risks notwithstanding, medium-term prospects are positive. The
significant expansion of public investment in recent years should crowd in
corporate investments and a recovery of agriculture and declining inflation
should boost private consumption growth. Under this baseline scenario, robust
growth and declining inflation are expected to reduce extreme and moderate
poverty.
Fiscal
consolation is expected to continue and help lower public debt-to-GDP
The
overall fiscal deficit is projected to continue to fall, helping to reduce
public debt gradually. The budget for FY24/25 targets a further consolidation
of the central fiscal deficit from 5.6 percent in FY23/24 to 4.9 percent in
FY24/25, driven by a continued reduction of current spending as a share of GDP.
Revenue growth is projected to remain robust, thanks to improved tax
administration, strong corporate profits and the higher-than-expected RBI
dividend. Growth in capital spending, at both central and state levels, should
moderate gradually while remaining high. The debt-to-GDP ratio is projected to
decline to around 82 percent by FY26/27.
The
current account deficit is expected to stabilize at around 1.5 percent of GDP
The
current account deficit is expected to remain at around 1-1.6 percent of GDP up
to FY26/27, supported by robust services exports and a continued expansion of
medium-and-high technology goods exports. It is expected to be adequately
financed by foreign investment flows, and foreign exchange reserves will
continue to provide ample cover against any adverse external development.
Special
focus: India’s trade opportunities in a changing global context
To
reach its US$1 trillion export target by 2030, India needs to diversify its
exports
India's
trade policy stance features both liberalizing measures and rising
protectionism
India's
current trade policy stance features both liberalizing measures and rising
protectionism. The implementation of the National Logistics Policy and digital
initiatives aimed at reducing logistics costs are proactive steps towards
enhancing trade facilitation and competitiveness. However, a resurgence in
protectionist measures, including increased tariff and non-tariff barriers, is
restricting India's trade openness. Recent Free Trade Agreements (FTAs) with
countries such as the United Arab Emirates (UAE) and Australia signify a move
towards preferential agreements. However, India does not participate in mega
trade blocs, such as the Regional Comprehensive Economic Partnership (RCEP),
despite potential benefits from broader trade cooperation.
India
could consider reforms in three areas
A
focused strategy toward achieving the US$1 trillion export target would include
measures to (i) reduce trade costs further, (ii) lower trade barriers, and
(iii) revisit FTAs and regional integration options:
1.
Reducing Trade Costs: India has taking very
positive steps and can still do much more to reduce trade costs and improve
trade facilitation, by simplifying and increasing the transparency of customs
procedures and reducing red tape.
2.
Lowering Trade Barriers: Reducing tariff and
non-tariff barriers, relaxing restrictions on services trade, and making trade
policies more predictable are all essential to boosting export competitiveness.
Additional supportive policies that help exporters access vital imported
intermediate inputs would also be critical.
3.
Reevaluating FTAs and trade integration
options: India could continue pursuing FTAs with a focus on assessing their
impact and adjusting the overall strategy as needed. The country could also reevaluate
its approach to trade integration, including the options on RCEP.