Indian Economy – A Review: Key Takeaways

Each year, a day before the presentation of the budget document, the central government presents an Economic Survey. However, owing to the upcoming elections, the economic survey was not unveiled on January 31. Instead, the government has issued a report titled 'Indian Economy–A Review,' detailing India's progress over the past decade. This report, prepared by the office of the Chief Economic Advisor (CEA) V Anantha Nageswaran, also provides insights into the economic outlook for the upcoming years.

In this article, we summarize the key takeaways from the report.

Overview of the Indian Economy (1950-2014)  

Initially (1950-1980), India operated as a closed economy with import substitution, export subsidies, and strict controls on technology and investment. Post-1980, recognizing the limitations of this approach, pro-business reforms were introduced, including import liberalization, export incentives, and an expansionary fiscal policy. While these changes aimed to enhance productivity and boost demand through improved credit availability and increased public expenditure, they also led to unsustainable investments, questionable loans, and a Balance-of-Payments (BoP) crisis in 1990-91.

The 1991 Balance-of-Payments (BoP) crisis marked a turning point in India's economic trajectory. Reforms were initiated to dismantle a complex system of rules, licenses, and state ownership biases, shifting away from inward-looking trade strategies. India moved towards becoming a market economy by removing industrial licensing and liberalizing foreign direct investment (FDI). However, the latter half of the 1990s experienced a growth slowdown, influenced by the East Asian financial crisis, fiscal setbacks, agricultural challenges, structural reform delays, and political instability. Some attribute the slowdown to inflation-driven monetary tightening.

The early 2000s experienced robust domestic economic activity, improved corporate performance, a favorable investment climate, and positive sentiments toward India as a preferred investment destination. Transformative reforms from 1998-2002 contributed to this growth, global economic expansion, and increased capital flows to India. Initiatives like Sarva Shiksha Abhiyan (SSA), National Rural Health Mission (NRHM), and National Rural Employment Guarantee Scheme (NREGS) were implemented. However, the global financial crisis in 2008 revealed vulnerabilities, leading to a rise in bad debts in banks, reaching double-digit percentages by March 2018, primarily originating between 2006 and 2008.

During 2009-2014, the government aimed to sustain growth through persistent high fiscal deficits and prolonged loose monetary policies. Nominal GDP growth remained elevated due to high inflation, with India experiencing annual double-digit inflation rates for five consecutive years. The country grappled with significant twin deficits - a fiscal deficit of 4.9% in FY13 and a current account deficit of 4.8% in FY13 - leading to an overvalued rupee. In 2013, these challenges culminated in a sharp depreciation of the Indian rupee against the US dollar, declining annually by 5.9%. Consequently, economic growth stagnated.

Decade of transformative growth (2014-2024)          

The Indian economy underwent significant structural reforms during this period, boosting its macroeconomic foundations. These measures propelled India to become the fastest-growing economy among G20 nations. Further, efficient handling of the COVID-19 pandemic and recent geopolitical challenges has ensured that the Indian economy continues to outperform its global peers. Current estimates suggest a growth of 7.3% in 2023-24, building on the impressive 9.1% (FY22) and 7.2% (FY23) growth in the preceding two years. It is commendable that India is expected to post a GDP growth rate of over 7% for the third year in a row while the global economy is struggling to post a 3% growth.

The structural reforms implemented since 2014 have strengthened the macroeconomic fundamentals of the economy. Below, we list the key reforms implemented during the last decade:

Challenges Emerge Alongside India's Reform-Driven Growth

The report also emphasized the challenges that the Indian economy is facing. These challenges are:

Geoeconomic changes and evolving globalization trends: India's economic growth is not only influenced by its own actions but also by global events. As the world becomes more interconnected, global trade patterns and economic cooperation changes impact India. The current trend of friend shoring and onshoring, driven by a shift away from hyper-globalization, is affecting worldwide trade and, consequently, overall global growth.

Complex Interplay of Energy Security and Economic Growth: Choosing between ensuring enough energy for economic growth and transitioning to cleaner energy is a complex issue. It involves factors like politics, technology, finances, economics, and society. Moreover, decisions made by one country affect others, making the situation even more intricate.

Employment risks in the AI era: The rise of Artificial Intelligence (AI) is a significant challenge for governments globally, especially in service sectors where jobs may be affected. An IMF paper suggests that 40% of global jobs are at risk due to AI, presenting both opportunities and risks.

Filling the gaps in the Skills, Education, and Health ecosystem: Nationally, it's vital to ensure a skilled workforce, quality education at all levels, and good health among the population. This boosts economic productivity by having capable and healthy workers.

Factors Driving the Domestic Economy

Strong Credit Growth: Bank credit has grown remarkably in recent years, surpassing deposit growth fueled by sustained demand and robust post-pandemic economic recovery. FY23 witnessed a noteworthy 15% growth in non-food bank credit, the highest in the past decade. This surge in credit was accompanied by a substantial enhancement in the banking sector's health. Notably, the asset quality across all Scheduled Commercial Banks (SCBs) groups improved, with Gross Non-Performing Assets (GNPAs) and Net NPAs reaching a multi-year low by September 2023. This positive transformation in the banking sector contrasts sharply with the challenges it faced in the previous decade, emphasizing the success of reforms the government and the RBI implemented in addressing the "twin balance sheet problem." The cleansing of balance sheets facilitated a healthier credit environment and a revival of credit growth.

Declining Gross Non-Performing Assets of SCBS (as % of Gross Advances)

Source: DEA; Note: FY23 represents March -September 2023.

Stability of the Macroeconomic Environment: Between FY09 and FY14, there was high retail inflation, averaging 10%. However, since the introduction of flexible inflation targeting around 4% (with a band of +/- 2%) in FY16, retail inflation averaged 4.2% till FY20. The Price Stabilization Fund (PSF), established in 2014-15, effectively managed price fluctuations in key agri-horticultural goods.

In FY24 (April-December), inflationary pressures eased, with average retail inflation at 5.5%, compared to 6.8% in FY23. This decline was led by favorable core (non-food, non-fuel) inflation trends, reaching a 49-month low of 3.8% in December 2023. Overall, retail inflation is now stable, staying within the defined tolerance band of 2 to 6 percent. The RBI predicts an average inflation of 5.4% in FY24.

Retail Inflation % in India

Source: DEA; Note: * data for FY23 is Revised, and FY24 is an Estimate.

India's robust external sector demonstrating resilience in challenging times: India's external sector displays resilience with robust merchandise and services exports. Merchandise exports reached a record high of US$ 451.1 billion in FY23, while services exports, especially in software, consistently contribute significantly. The nation's trade balance improved, witnessing a US$ 166.4 billion surplus in April-November 2023. Remittances, totaling US$ 125 billion in 2023, contribute to the current account balance, maintaining a comfortable position.

India attracts foreign investment, with foreign portfolio investors (FPIs) increasing exposure by US$ 28.8 billion in H1 FY24. The country remains a preferred Foreign Direct Investment (FDI) destination, achieving a cumulative FDI of US$ 596.5 billion during FY15-FY23. Stable macroeconomic factors and a positive global perception attract investors. The Indian rupee remains stable against the US dollar, and foreign exchange reserves reach US$ 623.2 billion, covering over ten months of imports.

Challenges, such as geopolitical tensions and rising shipping costs, pose risks. While the share of exports in GDP may moderate in FY24 due to global demand slowdown, sustained FDI inflows and confidence in the Indian economy are anticipated. Remittances are expected to grow by 8%, reaching US$ 135 billion in 2024, contributing to India's economic stability.

Continued focus on enhancing social infrastructure: The Union government's spending on social services saw a Compound Annual Growth Rate (CAGR) of 5.9% from FY12 to FY23, with an 8.1% CAGR in capital expenditure, indicating the development of societal assets. Initiatives like the Ujjwala Yojana, PM-Jan Aarogya Yojana, PM-Jal Jeevan Mission, Ayushman Bharat scheme, and PM-AWAS Yojana prioritize universal access to basic amenities. This approach, distinct from short-term measures, not only constructs lasting social infrastructure but also elevates individuals to improved living standards and opportunities, fostering empowerment among previously underserved segments of the Indian population.

Other Key Factors:

• Rising Youth Employment Trends: According to the Periodic Labour Force Survey (PLFS), the youth unemployment rate decreased from 17.8% in 2017-18 to 10% in 2022-23.
• Women's Workforce Empowerment: Female Labor Participation Rate (LFPR) increased from 23.3% in 2017-2018 to 37% in 2022-23, reflecting a shift towards women-led development in India. Female Gross Enrolment Ratio (GER) in senior secondary education more than doubled from 24.5% in FY 2005 to 58.2% in FY 2022, and the female GER in higher education quadrupled from 6.7% in FY 2001 to 27.9% in FY 2021.
• Service Sector Growth: The service sector's share in total GVA has risen from 51.1% in FY14 to 54.6% in FY24, driven by a surge in non-contact services post-pandemic. The government's digitalization drive has significantly shaped the service sector's digital face.
• Consumption-Led Growth and Private Final Consumption Expenditure (PFCE): PFCE's share in GDP has emerged as a major growth driver, increasing from an average of 58.4% in the eight years preceding the pandemic to 60.8% in the last three years. The rise in per capita real Gross National Income (GNI) and pragmatic policies have strengthened consumption demand.
• Agricultural Sector Resilience: Despite global challenges and climate variability, the agricultural sector has shown remarkable persistence, growing at an average annual rate of 3.7% from FY15 to FY23. Record increases in food grain production and substantial growth in agricultural exports contribute to India's agricultural sector resilience.

The Road Ahead

The report states that India's robust growth is anticipated to continue, supported by macroeconomic stability. The official estimate for FY24 projects a 7.3% growth rate, with decreasing headline inflation. Favorable factors include resilient service exports, lower oil import costs, and a reduced current account deficit of 1% of GDP in H1 FY24. The positive outlook is driven by the digital revolution, supportive regulatory environment, social and economic upliftment measures, and efforts to diversify exports. Reforms implemented over the past decade establish a foundation for resilient governance, setting the stage for sustained economic growth. Further reforms at sub-national levels, focusing on MSMEs, regulatory efficiency, land availability, and energy needs, are expected to accelerate economic growth.