Economic Survey: A nuanced understanding of complexities facing Indian economy

The Economic Survey 2023-24, presented in Parliament on Monday (July 22), offers a cautiously optimistic projection for India's economic growth, estimating real GDP growth at 6.5-7 per cent for FY25. This conservative outlook carefully assesses various factors influencing the economy, particularly in light of elevated market expectations.

The projected growth range indicates a more tempered view compared to previous forecasts, acknowledging potential challenges ahead. The survey highlights that while private capital formation has shown signs of recovery, it may become more cautious due to concerns over cheaper imports from countries with excess production capacity.

Post-COVID recovery

This caution could hinder the momentum built over the past few years, especially as the economy transitions from a post-pandemic recovery phase.

The survey indicates a likely increase in merchandise exports, driven by improved growth prospects in advanced economies (AEs). Additionally, services exports are expected to witness further growth, which could provide a buffer against domestic uncertainties.

However, the reliance on external markets underscores the vulnerability of the Indian economy to global economic fluctuations.

Monsoon and farm sector

The forecast of normal rainfall and a satisfactory spread of the southwest monsoon is promising for the agricultural sector, which is crucial for rural demand revival. Nonetheless, the monsoon season is still ongoing, and uncertainties remain regarding its overall impact.

The agricultural sector's performance will be pivotal in shaping economic recovery and sustaining growth.

Reforms yielding results

In FY23 and FY24, the agriculture sector was affected by extreme weather events, lower reservoir levels and damaged crops that adversely affected farm output and food prices. So, food inflation based on the Consumer Food Price Index (CFPI) increased from 3.8 per cent in FY22 to 6.6 per cent in FY23 and further to 7.5 per cent in FY24.

The survey notes that structural reforms, particularly the implementation of the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), have matured and are beginning to yield positive results. These reforms are essential for enhancing economic efficiency and stability.

Global economic growth

On the global front, the International Monetary Fund (IMF) projects a growth rate of 3.2 per cent for the world economy in 2024, with inflationary pressures easing in many regions.

However, core inflation remains a concern, primarily due to persistent service sector inflation. The potential for central banks, particularly the Federal Reserve and the European Central Bank, to reduce interest rates could provide a conducive environment for emerging market economies, including India, to lower capital costs.

Despite global and external challenges, India’s economy carried forward the momentum it built in FY23 into FY24. The focus on maintaining macroeconomic stability ensured that these challenges had minimal impact on India’s economy. As a result, India’s real GDP grew by 8.2 per cent in FY24, posting over 7 per cent growth for a third consecutive year, driven by stable consumption demand and steadily improving investment demand.

Slowing private sector

The previous year's survey focused heavily on the recovery from the Covid-19 pandemic, noting growth rates of 9.7 per cent and 7.0 per cent in preceding years but expressing concerns regarding the sustainability of this recovery.

Investment and capital formation were key areas of focus in both surveys. The 2022-23 survey emphasised the need for sustained private investment to drive growth, particularly following the pandemic's impact on private sector capital formation.

The latest survey, however, notes that while public investment continues to support capital formation, private sector growth has slowed. This slowdown highlights a critical need for renewed momentum in private investment to sustain economic growth, marking it as a potential area of concern.

Wooing foreign investors

Foreign Direct Investment (FDI) remains a mixed bag. The 2022-23 survey raised alarms about sustaining foreign investor interest amid global economic conditions; while the 2023-24 survey shows that FDI has remained relatively stable, the investment interest of external investors, measured in terms of dollar inflows of new capital, was $45.8 billion in FY24 compared to $47.6 billion in FY23.

This decline mirrors broader global trends but also underscores the necessity for India to enhance its attractiveness to foreign investors in the face of rising interest rates and geopolitical uncertainties.

Employment blues

Employment generation continues to be a significant concern. The 2022-23 survey emphasised the need for comprehensive labour market data to better understand employment trends.

While the 2023-24 survey notes improvements in factory jobs and the corporate sector's role in job creation, it calls for better data and accountability in job creation efforts. This suggests that although progress is being made, substantial work remains to address employment challenges comprehensively.

Corporate sector performance has seen notable changes. The 2022-23 survey highlighted the need for greater contributions from the corporate sector to capital formation and job creation.

The 2023-24 survey goes further, reporting remarkable corporate profitability with profits before taxes nearly quadrupling since FY20. However, it also stresses the importance of corporate responsibility in job creation and investment in critical sectors, indicating a shift towards expecting more from the corporate sector in terms of social responsibility and economic contribution.

Farm policies, small enterprises

Both surveys emphasise the need for structural reforms and better policy coordination. The 2022-23 survey suggested a tripartite approach involving the government, private sector and academia for skill development and employment generation.

The 2023-24 survey reiterates these themes while emphasising the importance of aligning agricultural policies and supporting small enterprises. This reflects a more comprehensive approach to addressing the challenges posed by global dynamics and technological advancements, crucial for sustaining growth.

While the Economic Survey 2023-24 presents a more positive and resilient picture of India's economy compared to the previous year's survey, it also acknowledges ongoing challenges, particularly in private investment and employment generation.

The emphasis on corporate responsibility and strategic policy interventions reflects a nuanced understanding of the complexities facing the Indian economy. Continued efforts in these areas will be essential to maintain momentum and ensure sustainable growth in the years to come.

Challenges for Indian economy

Budgeted capital expenditure has risen 2.7 times in the last seven years, from FY16 to FY23, reinvigorating the capex cycle. Reforms such as the introduction of the Goods and Services Tax and the Insolvency and Bankruptcy Code have enhanced efficiency, transparency and financial discipline in the economy, contributing to the improved growth outlook.

However, the 2023-24 survey, quoting IMF projections, said the global economy is expected to grow at 3.2 per cent in 2024, with risks being broadly balanced. The average annual global growth was 3.7 per cent during the decade ending FY20. This suggests that while India's economy is expected to perform better, external factors like slower global growth and increased uncertainty may pose challenges.