Amidst challenges, India’s GDP is on the northwards

Challenges apart, the year 2023 was good for India when it comes to the economic growth. What with India joining the Top Five Economy club of the world during the year by surpassing the UK in terms of GDP, which serves as a key metric for assessing the magnitude of a nation's economy. At present, India boasts of having the GDP at $3,730 billion

Prime Minister, Narendra Modi has recently said that the country is all set to join the Top Three Economy club of the world. The PM has said that his government made India the world’s 5th largest economy in the last 10 years and assured that during his third tenure the country’s economy will be among the top three. “When we (BJP) formed the government in 2014, I punctured all the tyres of Congress’ corrupt machinery. We created a ‘Trishakti’ of Aadhaar, bank accounts and mobilephones that Congress’ corrupt machine could not bear,” he said while addressing a poll rally in Damoh district of Madhya Pradesh in early November. As per International Monetary Fund's projections, India is likely to become a $5 trillion economy by 2026-27. “India will be the world's future talent factory as it will have 20% of the world's working population by 2047,” said Bob Sternfels, CEO, McKinsey & Co., some time back.

India’s economy is likely to grow in the range of 5.5 per cent to almost 6 per cent in the current financial year, according to Jahangir Aziz, head of emerging market economics at JP Morgan. This is lower than the Reserve Bank of India’s 6.5 per cent forecast for FY24. Aziz said that India will have an outstanding year in FY25 if it clocks a growth rate of 5.5 per cent given that the headwinds to global conditions are terrible and would be relentless in 2024.

Global headwinds will continue to persist and intensify due to high-interest rates, geopolitical tensions and sluggish demand, according to the World Bank. Global economic growth is also set to slow down over the medium term against a background of these combined factors, it said.

India continues to enjoy relative macroeconomic stability at this moment but is vulnerable to one key risk - supply disruption in crude oil prices because of escalation in the war, resulting in a spike in crude oil prices

The World Bank forecasts India’s GDP growth at 6.3 percent for FY24, after expanding at 7.2 percent in FY23. The expected moderation is mainly due to challenging external conditions and waning pent-up demand, the World Bank said on 3 October.

In October, the RBI retained its GDP growth forecast of 6.5 per cent for FY24 and FY25, although it narrowed the range of its quarterly projections for the next financial year. The central bank now estimates quarterly growth rates in FY25 in the range of 6.3-6.6 per cent.

The RBI's growth forecast for the current year is on the higher side, with most other estimates closer to 6 percent, although there were some upward revisions in the projections following the release of GDP data for April-June.

However, growth is generally seen falling in FY25. Nomura expects India's GDP growth to moderate to 5.6 percent next year from 5.9 percent in FY24.

Data released by the statistics ministry on August 31 showed the Indian economy expanded by 7.8 percent in April-June, compared with economists' expectations of 7.8 percent but lower than the RBI's view of 8 percent.

Aziz’s view is less optimistic, given the concerns around global growth. “The second quarter of this fiscal was already the best global year we have seen in a long time. So, it is not going to be surprising if India does well when the rest of the world is growing,” he said, adding that the question is whether India will grow when the world isn’t.

“India’s dependence on the global economy is significantly more than what we would like to believe. India remains driven by global factors; we just don’t like to accept it. India’s domestic economy is not enough to drive its growth. You can see how private investment has been doing—it has been languishing and whenever it picks up, it does when global growth or exports improve,” said Aziz.

Recently, RBI Governor, Shaktikanta Das, said that GDP growth for the second quarter of FY24 is likely to surpass expectations, based on early indicators. The central bank has projected growth of 6.5 per cent for the July- September period.

Of course, this remarkable growth forecasts also comes with a host of challenges at a time when other parts of the globe are struggling to have GDP growth as per their aspirations. It is quite natural for the country at a time when India has emerged as the largest country of the world in the middle of 2023. The only matter of relief can be the fact that the overpopulation may be seen as the demographic dividend.

Let us discuss about the other challenges that are haunting the country’s progress. The rapid growth of population in India directly affects per capita income. India is ranked 144th position out of 194 economies in terms of GDP (nominal) per capita. In terms of Human Development Index, which is a composite of health, education and standard of living parameters-India ranks 131 in United Nations' human development index. Coming on Universal Health Coverage (UHC) Index, which is measured on a scale from 0 (worst) to 100 (best), India has a score of 62.

India has become a net importer of steel which is a matter of concern. This fact was endorsed by Tata steel MD & CEO, TV Narendran recently. However, the good thing is that the government has assured of intervention.

The ongoing Israel-Hamas war poses yet another challenge before India’s economic growth in the future. The challenges may come in forms like costlier crude oil, sliding INR against the Greenback and above all, falling jewellery export to Israel.

Not to mention, high crude oil prices hurt India impacting currency stability (making imports expensive), possibly worsening the government’s fiscal deficit (the government is likely to absorb higher prices by cutting excise duty), widening the CAD further impacting currency adversely and affecting the profit margins of sectors such as aviation, paints, tyres and chemicals.

“All these implications could have a negative impact on economic growth in the short term, as high inflation and low profitability in various sectors would hit disposable incomes and discretionary spending,” says Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors.

The conflict is not affecting India's trade with Israel immediately. Should the battle escalate, supply-side issues may arise. India's 1.8 per cent merchandise exports to Israel are mostly petroleum products. Israel imports $5.5–6 billion in refined hydrocarbons from India. India's exports to Israel were $8.4 billion in FY23. India imports equipment, pearls, diamonds, and other precious and semi- precious stones from Israel. India imported $2.3 billion from Israel in 2023.

The market’s logic is quite similar to the Russian-Ukraine war. Crude and war- stocks apart, safe heaven asset classes like US Treasuries, gold only tend to be impacted. Crude is up nearly 7 per cent and gold by 5.5 per cent since October 05.

RBI Governor Shaktikanta Das said that GDP growth for the second quarter of FY24 is likely to surpass expectations, based on early indicators. The central bank has projected growth of 6.5 per cent for the July- September period

Still, India continues to enjoy relative macroeconomic stability at this moment but is vulnerable to one key risk - supply disruption in crude oil prices because of escalation in the war, resulting in a spike in crude oil prices.

Indian economy has rather hiked its growth forecast from 6.1 to 6.3 per cent for the current year in the recent past. Apart from it, this market is the fastest growing in the world for the second consecutive year. It is an interesting fact at a time when the neighbouring country China’s growth has been forecast to reach five per cent during the time periods.