Analysis of Indian Economic

Growth & Development

Dr Naveen Kumar K
National Institute of Bank Management, Pune
INDIA AT A GLANCE

• Since the 2000s, India has made remarkable progress in reducing absolute
poverty. Between 2011 and 2015, more than 90 million people were lifted out of
extreme poverty.
• However, the COVID-19 pandemic led India’s economy into a contraction of 7.3
percent in FY21, despite well-crafted fiscal and monetary policy support.
• Successful implementation of agriculture and labor reforms would boost medium-
term growth, while weakened household and corporate balance sheets may
constrain it.
• The economic slowdown triggered by the outbreak is believed to have had a
significant impact especially on poor and vulnerable households.
• The informal sector, where the vast majority of India’s labor force is employed, has
been particularly affected.
• As in most countries, the pandemic has exacerbated vulnerabilities for traditionally
excluded groups, such as youth, women, and migrants. Labor market indicators
suggest that urban households are now more vulnerable to fall into poverty than
they were before the onset of the pandemic.
• The response of the government to the COVID-19 outbreak has been swift and
comprehensive.
• A national lockdown to contain the health emergency was complemented by a
comprehensive policy package to mitigate the impact on the poorest households
(through various social protection measures) as well as on small and medium
enterprises (through enhanced liquidity and financial support).
• To build back better, it will be essential for India to stay focused on reducing
inequality, even as it implements growth-oriented reforms to get the economy
back on track.
• Economic Outlook
• In response to the COVID-19 shock, the government and the Reserve Bank of
India took several monetary and fiscal policy measures to support vulnerable
firms and households, expand service delivery (with increased spending on
health and social protection) and cushion the impact of the crisis on the
economy.
https://www.imf.org/en/Countries/IND
MARKET SIZE • India’s nominal gross domestic product (GDP) at
current prices is estimated to be at Rs. 232.15 trillion
(US$ 3.12 trillion) in FY22. With more than 100
unicorns valued at US$ 332.7 billion, India has the
third-largest unicorn base in the world. The
government is also focusing on renewable sources to
generate energy and is planning to achieve 40% of its
energy from non-fossil sources by 2030.

• According to the McKinsey Global Institute, India

needs to boost its rate of employment growth and
create 90 million non-farm jobs between 2023 and
2030 in order to increase productivity and economic
growth. The net employment rate needs to grow by
1.5% per annum from 2023 to 2030 to achieve 8-8.5%
GDP growth between 2023 and 2030. India's current
account deficit (CAD), primarily driven by an increase
in the trade deficit, stood at 2.1% of GDP in the first
quarter of FY 2022-23.
 RECENT DEVELOPMENTS
• India is primarily a domestic demand-driven economy, with consumption and
investments contributing to 70% of the economic activity. With an improvement in the
economic scenario and the Indian economy recovering from the Covid-19 pandemic
shock, several investments and developments have been made across various sectors of
the economy.
• According to World Bank, India must continue to prioritise lowering inequality while also
putting growth-oriented policies into place to boost the economy. In view of this, there
have been some developments that have taken place in the recent past. Some of them
are mentioned below.
• As of September 21, 2022, India’s foreign exchange reserves stood at US$ 524,520
million.
• The private equity-venture capital (PE-VC) sector investments stood at US$ 2 billion in
September 2022.
• Merchandise exports in September 2022 stood at US$ 32.62 billion.
• PMI Services remained comfortably in the expansionary zone at 56.7 during April-
September 2022.
• In September 2022, the gross Goods and Services Tax (GST) revenue collection stood at
Rs. 147,686 crore (US$ 17.92 billion).
• ‘Between April 2000-June 2022, cumulative FDI equity inflows to India stood at US$
604,996 million.
• In August 2022, the overall IIP (Index of Industrial Production) stood at 131.3. The
Indices of Industrial Production for the mining, manufacturing and electricity sectors
stood at 99.6, 131.0 and 191.3, respectively, in August 2022.
• According to data released by the Ministry of Statistics & Programme Implementation
(MoSPI), India’s Consumer Price Index (CPI) based retail inflation reached 7.41% in
September 2022.
• In FY 2022-23, (until October 28, 2022), Foreign Portfolio Investment (FPI) outflows
stood at Rs. 58,762 crore (US$ 7.13 billion).
• The wheat procurement in Rabi 2021-22 and the anticipated paddy purchase in Kharif
2021-22 would include 1208 lakh (120.8 million) metric tonnes of wheat and paddy
from 163 lakh (16.7 million) farmers, as well as a direct payment of MSP value of Rs.
2.37 lakh crore (US$ 31.74 billion) to their accounts.
State of the Economy 2022-23: Recovery Complete

• Recovering from pandemic-induced contraction, the Russian-Ukraine conflict and inflation, the
Indian economy is staging a broad-based recovery across sectors, positioning itself to ascend to
the pre-pandemic growth path in FY23.
• India's GDP growth is expected to remain robust in FY24. GDP forecast for FY24 to be in the
range of 6-6.8%.
• Private consumption in H1 is the highest since FY15 and this has led to a boost to production
activity resulting in enhanced capacity utilisation across sectors.
• The Capital Expenditure of the Central Government and crowding in the private Capex led by the
strengthening of the balance sheets of the Corporates is one of the growth drivers of the Indian
economy in the current year.
• The credit growth to the MSME sector was over 30.6% on average during Jan-Nov 2022.
• Retail inflation is back within RBI's target range in November 2022.
• Indian Rupee performed well compared to other Emerging Market Economies in Apr-Dec 2022.
• Direct Tax collections for the period April-November 2022 remain buoyant.
• Enhanced Employment generation seen in the declining urban unemployment rate and in the
faster net registration in Employee Provident Fund.
• Economic growth to be boosted by the expansion of public digital platforms and measures to
boost manufacturing output.
 INDIA’S MEDIUM-TERM GROWTH OUTLOOK
• Indian economy underwent wide-ranging structural and governance reforms that
strengthened the economy's fundamentals by enhancing its overall efficiency during
2014-2022.
• With an underlying emphasis on improving the ease of living and doing business,
the reforms after 2014 were based on the broad principles of creating public goods,
adopting trust-based governance, co-partnering with the private sector for
development, and improving agricultural productivity.
•The period of 2014-2022 also witnessed balance sheet stress caused by the credit
boom in the previous years and one-off global shocks, that adversely impacted the
key macroeconomic variables such as credit growth, capital formation, and hence
economic growth during this period.
•This situation is analogous to the period 1998-2002 when transformative reforms
undertaken by the government had lagged growth returns due to temporary shocks
in the economy. Once these shocks faded, the structural reforms paid growth
dividends from 2003.
•Similarly, the Indian economy is well placed to grow faster in the coming decade
once the global shocks of the pandemic and the spike in commodity prices in 2022
fade away.
•With improved and healthier balance sheets of the banking, non-banking and
corporate sectors, a fresh credit cycle has already begun, evident from the double-
digit growth in bank credit over the past months.
•The Indian economy has also started benefiting from the efficiency gains resulting
from greater formalisation, higher financial inclusion, and economic opportunities
created by digital technology-based economic reforms.
•India's growth outlook seems better than in the pre-pandemic years and the Indian
economy is prepared to grow at its potential in the medium term.
 FISCAL DEVELOPMENTS

•The Union Government finances have shown a resilient performance during the year FY23,
facilitated by the recovery in economic activity, buoyancy in revenues from direct taxes and GST,
and realistic assumptions in the Budget.
•The Gross Tax Revenue registered a YoY growth of 15.5% from April to November 2022, driven by
robust growth in the direct taxes and Goods and Services Tax (GST).
•Growth in direct taxes during the first eight months of the year was much higher than their
corresponding longer-term averages.
•GST has stabilised as a vital revenue source for central and state governments, with the gross
GST collections increasing at 24.8% on a YoY basis from April to December 2022.
•Union Government's emphasis on capital expenditure (Capex) has continued despite higher
revenue expenditure requirements during the year. The Centre's Capex has steadily increased
from a long-term average of 1.7% of GDP (FY09 to FY20) to 2.5% of GDP in FY22 PA.
•The Centre has also incentivised the State Governments through interest-free loans and
enhanced borrowing ceilings to prioritise their spending on Capex.
•With an emphasis on infrastructure-intensive sectors like roads and highways, railways, and
housing and urban affairs, the increase in Capex has large-scale positive implications for medium-
term growth.
•The Government’s Capex-led growth strategy will enable India to keep the growth-interest rate
differential positive, leading to a sustainable debt to GDP in the medium run.
 MONETARY MANAGEMENT AND FINANCIAL INTERMEDIATION: A GOOD YEAR

•The RBI initiated its monetary tightening cycle in April 2022 and has since raised
the repo rate by 225 bps, leading to moderation of surplus liquidity conditions.
•Cleaner balance sheets led to enhanced lending by financial institutions.
•The growth in credit offtake is expected to sustain, and combined with a pick-up in
private capex, will usher in a virtuous investment cycle.
•Non-food credit offtake by scheduled Commercial Banks (SCBs) has been growing
in double digits since April 2022.
•Credit disbursed by Non-Banking Financial Companies (NBFCs) has also been on
the rise.
•The Gross Non-Performing Assets (GNPA) ratio of SCBs has fallen to a seven-
year low of 5.0.
•The Capital-to-Risk Weighted Assets Ratio (CRAR) remains healthy at 16.0.
•The recovery rate for the SCBs through Insolvency and Bankruptcy (IBC) was
highest in FY22 compared to other channels.
 PRICES AND INFLATION

•While the year 2022 witnessed a return of high inflation in the advanced world after three
to four decades, India caps the rise in prices.
•While India’s retail inflation rate peaked at 7.8% in April 2022, above the RBI’s upper
tolerance limit of 6%, the overshoot of inflation above the upper end of the target range in
India was however one of the lowest in the world.
•The government adopted a multi-pronged approach to tame the increase in price levels.
•Phase-wise reduction in the export duty of petrol and diesel.
•Import duty on major inputs was brought to zero while tax on the export of iron ores and
concentrates increased from 30% to 50%.
•Waived customs duty on cotton imports w.e.f 14 April 2022, until 30 September 2022.
•Prohibition on the export of wheat products under HS Code 1101 and imposition of export
duty on rice.
•Reduction in basic duty on crude and refined palm oil, crude soyabean oil and crude
sunflower oil
•The RBI’s anchoring of inflationary expectations through forward guidance and
responsive monetary policy has helped guide the trajectory of inflation in the country.
•The one-year-ahead inflationary expectations by both businesses and households have
moderated in the current financial year.
•Timely policy intervention by the government in the housing sector, coupled with low
home loan interest rates propped up demand and attracted buyers more readily in the
affordable segment in FY23.
•An overall increase in composite Housing Price Indices (HPI) assessment and Housing
Price Indices market prices indicates a revival in the housing finance sector. A stable to
moderate increase in HPI also offers confidence to homeowners and home loan financiers
in terms of the retained value of the asset.
•India’s inflation management has been particularly noteworthy and can be contrasted with
advanced economies that are still grappling with sticky inflation rates.
 Economy recovers past Pre-Pandemic levels
 The Indian economy, as seen in quarterly
estimates of GDP, has been staging a
sustained recovery since the second half
of 2020-21.

 Although the second wave of the pandemic

in April- June 2021 was more severe from
a health perspective, the economic impact
was muted compared to the national
lockdown of the previous year (see Figures
1 & 2).
 Advance estimates suggest that GDP will
record an expansion of 9.2 per cent in 2021-
22. This implies that the level of real
economic output will surpass the pre-COVID
level of 2019-20.
SECTORAL TRENDS  The agricultural sector was the least impacted
by the pandemic-related disruptions.
 It is estimated to grow 3.9 per cent in 2021-22
on top of 3.6 per cent and 4.3 per cent
respectively in the previous two years (Table
1). This sector now accounts for 18.8 per cent
of GVA.
 Figures 5 and 6, the area sown under Kharif and Rabi crops, and the production of wheat and
rice has been steadily increasing over the years.
 In the current year, food grains production for the Kharif season is estimated to post a record
level of 150.5 million tonnes.
 Importantly, the strong performance of the sector was supported by Government policies that
ensured timely supplies of seed and fertilizers despite pandemic related disruptions.
 It was also helped by good monsoon rains as reflected in reservoir levels being higher than
the 10-year average (Figure 4).
 Since January 2021, the widely used Purchasing Managers’ Index-Manufacturing has remained
in the expansionary zone (i.e. over 50) except for one month when the second wave had slowed
down economic activity (Figure 8).
 The Index of Industrial Production (IIP) and Core Industry indices have both followed a similar
pattern and, in November 2021, went past their pre-pandemic level for the corresponding month
in 2019 (Figure 7).
 Rising capital expenditure by the government on infrastructure and an uptick in the housing
cycle have been responsible for reviving the construction sector.
 This has allowed the consumption and production of steel and cement consumption to revert
to pre-COVID levels (Figure 9).
 Statistics provided by RBI and leading real estate companies’ show significant revival in the
Indian residential real market in 2021 in terms of growth in sales, prices and new launches
(Figure 10 and 11).
 Services account for more than half of the Indian economy and was the most impacted by the
COVID-19 related restrictions, especially for activities that need human contact.
 Although the overall sector first contracted by 8.4 per cent in 2020-21 and then is estimated to
grow by 8.2 per cent in 2021-22, it should be noted that there is a wide dispersion of
performance by different sub-sectors.
 Both the Finance/Real Estate and the Public Administration segments are now well above pre-
COVID levels.
 However, segments like Travel, Trade and Hotels are yet to fully recover.
 It should be added that the stop-start nature of repeated pandemic waves makes it
especially difficult for these sub-sectors to gather momentum.
 Despite contact-sensitive services still being impacted by COVID, there has been a strong
recovery of the Purchasing Managers’ Index-Services since August 2021 (Figure 13).
 The Google mobility indicators for retail and recreation (i.e., restaurants, cafes, shopping centres,
etc.) and transit stations (public transport hubs such as subway, bus, and train stations),
measuring percentage deviation from pre-pandemic levels of mobility, has exceeded pre-
pandemic levels in December 2021 before the Omicron wave again led to restrictions (Figure 12).
 Similarly, the hotel occupancy rate has recovered substantially, reaching 56-58 per cent in
October 2021, from 30-32 per cent in April 2021 (Figure 14).
 In contrast to contact-based services, distance-enabled services have increased
their share with the growing preference for remote interfaces for office work,
education and even medical services.
 Indeed, there has been a boom in software and IT-enabled services exports
even as earnings from tourism have declined sharply (see Figures 15 & 16).
DEMAND TRENDS
 Latest advance estimates suggest full recovery of all components on the
demand side in 2021-22 except for private consumption.
 When compared to pre-pandemic levels, recovery is most significant in exports
followed by government consumption and gross fixed capital formation.
However, an equally strong recovery was seen in imports (Table 3 and Table 4).
Consumption

 Total consumption is estimated to have grown by 7.0 per cent in 2021-22 with
government consumption remaining the biggest contributor as in the previous
year (Table 3).
 Government consumption is estimated to grow by a strong 7.6 per cent
surpassing pre-pandemic levels.
 Private consumption is also estimated to have improved significantly to recover
97 per cent of corresponding pre-pandemic output level.
 This is supported by a sharp rebound in HFIs like IIP Consumer Durables
(Figure 17). However, the recent dip in vehicle registrations reflects persistent
supply-side constraints owing to the shortage of semi-conductor chips rather
than lack of consumption demand.
Investment

 Investment, as measured by Gross Fixed Capital Formation (GFCF) is expected

to see strong growth of 15 per cent in 2021-22 and achieve full recovery of pre-
pandemic level.
 Government’s policy thrust on quickening virtuous cycle of growth via capex and
infrastructure spending has increased capital formation in the economy lifting the
investment to GDP ratio to about 29.6 per cent in 2021-22, the highest in seven
years (Figure 19).
 While private investment recovery is still at a nascent stage, there are many
signals which indicate that India is poised for stronger investment.
 The number of private investment projects under implementation in
manufacturing sector has been rising over the years (Figure 20).
 Companies hitting record profits in recent quarters and mobilization of risk capital
bode well for acceleration in private investment (Figure 21).
 A sturdy and cleaned-up banking sector stands ready to support private
investment adequately.
 Expected increase in private consumption levels will propel capacity utilisation,
thereby fuelling private investment activity.
 RBI’s latest Industrial Outlook Survey results indicate rising optimism of investors
and expansion in production in the upcoming quarters.
Exports and Imports
 India’s exports of both goods and services have been exceptionally strong so far in 2021-22.
 Merchandise exports have been above US$ 30 billion for eight consecutive months in 2021-22,
despite a rise in trade costs arising from global supply constraints such as fewer operational
shipping vessels, exogenous events such as blockage of Suez Canal and COVID-19 outbreak
in port city of China etc. (Figure 22).
 Concurrently, net services exports have also risen sharply, driven by professional and
management consulting services, audio visual and related services, freight transport services,
telecommunications, computer and information services (Figure 23).
Financial Sector

 The financial system is always a possible area of stress during turbulent

times.
 However, India’s capital markets, have done exceptionally well and have
allowed record mobilization of risk capital for Indian companies.
 The Sensex and Nifty scaled up to touch its peak at 61,766 and 18,477 on
October 18, 2021.
 Among major emerging market economies, Indian markets outperformed its
peers in April-December 2021.
 The year 2021-22 so far has been an exceptional year for the primary
markets with a boom in fundraising through IPOs by many new age
companies/tech start-ups/unicorns.
 Rs 89,066 crore was raised via 75 IPO issues in April- November 2021,
much higher than in any year in the last decade
 More significantly, the banking system is well capitalized and the overhang of
Non- Performing Assets seems to have structurally declined even allowing for
some lagged impact of the pandemic.
 The Gross Non-Performing Advances (GNPA) ratio (i.e. GNPAs as a
percentage of Gross Advances) and Net Non-Preforming (NNPA) ratio of
Scheduled Commercial Banks (SCBs) continued to decline since 2018-19.
GNPA ratio of SCBs decreased from 7.5 per cent at end-September 2020 to
6.9 per cent at end-September 2021.
 NNPA ratio of SCBs also declined from 6 per cent at end of 2017-18 to 2.2 per
cent at end-September 2021 (Figure 31).
 Simultaneously, the Capital Adequacy Ratio has continued to improve since
2015-16.
 The Capital to risk-weighted asset ratio (CRAR) of SCBs increased from 15.84
per cent at end- September 2020 to 16.54 per cent at end-September 2021 on
account of improvement for both public and private sector banks