A lookback at 2023 will show it to be the year when hope was restored.
India climbed out from a series of economic disasters: pandemic lockdowns, the impact of the Ukraine war, inflation, and steep interest rate hikes. The stock market galloped to all-time highs, and everyone—from institutional investors to individuals—joined the equity rally.
Even the normally conservative Reserve Bank of India raised its FY2023-24 growth estimate to 7%.
One good year does not imply sustained growth, of course. But there were several growth-positive developments in 2023 that could give the economy some cheer going into the new year.
1. Twin-engine economy
The Indian economy is primarily driven by domestic consumption. In FY2022-23, private consumption and fixed investment accounted for 61% and 31% of GDP, respectively.
This is both a strength and a weakness. The strong contribution of consumption cushions India from global slowdowns, but a low investment rate limits growth, and keeps India in the mindset that a 6% growth rate is the ceiling.
In the past, emerging economies have achieved high growth by being export-oriented (e.g., Thailand and Singapore) or investment-oriented (China), or both.
The good news? The push towards higher capital expenditure in the previous two Union budgets has brought investment, too, back into focus. So far, the government has taken the lead on investing. But RBI surveys show that the envisaged capex of private corporations increased in FY2021-22 and FY2022-23. The general belief is that businesses are keen to invest, but are waiting for the general election in 2024 to be over.
2. Oil relief
Oil prices fell in the final quarter of 2023 despite the Israel-Hamas war and output cuts by oil producers. The price of the Indian basket of crude oil dropped from $93.5 per barrel in September to $77.6/bbl in December. Lower oil prices offer a welcome respite, because high prices push up inflation, worsen the trade deficit, and weaken the rupee. The relief may extend into 2024, as market conditions indicate that oil demand will stay weak amid adequate supply.
Slower growth is forecast in Europe as its economies deal with high interest rates. The other large oil consumer, China, seems to be in a structural growth slump. Greater adoption of electric vehicles is also expected to drag down oil demand.
On the supply side, booming US production, supported by record volumes from Iran and Brazil, have more-or-less cancelled the impact of the production cuts and reduced Russian supplies. This augurs well for oil importers like India.
3. Credit positive
The gap between India’s credit-to-GDP ratio and its underlying trend—called the “credit-to-GDP gap”—turned positive in June for the first time in a decade. This reflects improved credit demand.
Other indicators also suggest that the credit cycle may be turning. Bank credit grew at double-digit rates through 2023, capacity utilization of manufacturing companies is higher than the long-term average, and asset quality has improved across all sectors.
The last credit surge in 2004–2008 ended badly because imprudent lending by banks and overleveraging by corporates led to a surge in bad loans. This time, regulatory oversight is sharper and quicker: note how RBI intervened to impose curbs on unsecured lending before it could pose systemic risk issues.
The banking sector is in a good place, and looks poised to achieve a credit boom supported by judicious lending, strong borrower balance sheets, and low non-performing assets.
4. Geopolitical advantage
The China-plus-one strategy is expected to yield long-term benefits as companies de-risk by shifting some production out of China. But India saw some early payoffs in 2023. Notable examples include Foxconn, whose $2-billion additional investment was approved; Amazon, which plans to invest $26 billion by 2030; and Google, which announced local manufacturing of its Pixel smartphone.
India has certain advantages among countries vying for a slice of the China-plus-one pie. Its market size makes it ideal for catering to domestic as well as export markets. It has the required workforce to supply local labour for large facilities. To put that into perspective, India’s labour force is smaller than that of China, but 10 times the size of Vietnam and Mexico. Foxconn had 1 million workers in China; but only 50,000 in India as of June. In other words, this geopolitical shift could open up a large number of jobs for India.
5. Market sentiment
India’s booming stock market is the biggest story of December. It is not just about the Sensex crossing the 70,000 mark or India closing in on Hong Kong in the list of the world’s biggest stock markets. The sentiment underlying the bullishness is optimism about India’s growth potential. Markets are betting that India’s corporations, institutions and policymakers will deliver this time.
The signalling effect of a bull market is useful and necessary. As interest rates normalize and investment picks up, a bullish capital market will allow corporations to raise funds cheaply.
In the last quarter of 2023, leading brokerages including Morgan Stanley, JP Morgan, Goldman Sachs and Nomura Securities upgraded India to ‘overweight’, underscoring their expectation of further value generation in Indian markets.
Foreign portfolio investors are already making a shift: more than $9.2 billion have poured in during the last two months (till 15 December).
The author is an independent writer in economics and finance.