Mint Primer | India’s economy: Will the dream run continue this year?

A general election is due in May. (AFP)
A general election is due in May. (AFP)

Summary

  • For India, 2023 was a good year, underlined by strong economic growth, impressive tax mobilization, stable rupee and surging capital markets

For India, 2023 was a good year, underlined by strong economic growth, impressive tax mobilization, stable rupee and surging capital markets. Will the economy continue on a similar path in 2024? Mint looks at factors that can aid or disrupt the dream run.

How did the economy perform in 2023?

In 2023, Indian economy’s strong performance defied expectations. The 6.1% growth in the January-March quarter pushed FY23 growth to 7.2%. April-June and July-September quarters saw heady 7.8% and 7.6% growth, respectively. The quarter ending December is seen at 6.5%. Strong capex push, rising consumption, and continued growth in the global economy contributed to this good show. Direct tax collections grew 18% as of 9 November. Goods and Services Tax mop up (April-November) rose by 12%. The rupee remained stable. Buoyed, foreign investors pumped in 1.65 trillion, sending the stock markets soaring.

Will this dream run continue in 2024?

It could. The Reserve Bank of India has pegged FY24 GDP growth at 7%. Fitch Ratings pegs 2024 growth at 6.6% to 6.8%. The factors that drove economic growth in 2023 remain. The focus on capital expenditure continues with states spending big. Consumption will increase further if rural India starts spending more. Investment by corporate India is increasing catalysed by production linked incentive schemes. Inflation seems controlled and so further interest rate hikes are unlikely. Exports are rebounding as monetary tightening has eased in developed economies as they have reined in inflation.

Will the election accelerate economic growth?

The general election is due in May. There is no evidence that elections cause an economic bump. In the last three elections, the economy slowed twice and grew marginally once. Experts put FY24 growth rate marginally lower than the 7.2% in FY23. Their fear is more about the risk of fiscal profligacy and its after-effects as populism has risen in recent elections.

What about the global economy?

Runaway inflation across most developed economies forced their central banks to raise interest rates and this caused global economic growth to slow down from 3.5% in 2022 to 3% in 2023. The International Monetary Fund (IMF) expects 2024 growth at 2.9%. Fear of recession in developed countries has receded as monetary tightening has almost ended. IMF expects global inflation to drop to 5.8% in 2024 from 6.9% in 2023. The Chinese economy is back to growth after measures taken by its government.

What can upset this economic revival?

A flare-up in geo-political tensions can play spoilsport. The widening of the Israel-Palestinian crisis appears real with Houthi rebels attacking ships plying in the Red Sea. This could create a supply-chain disruption. If the conflict expands (US says Iran is behind the Red Sea attacks), prices of oil and other commodities will increase. This could fuel inflation, trigger another round of interest rate hikes, and smother economic revival. Although back to growth, China is still wobbly as it struggles to tame its property crisis.

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