Economic survey 2023 paints a picture of optimism

Growing GDP in difficult time

Finance Minister, Nirmala Sitharaman tabled the Economic Survey 2022-23 on the floor of the house, on 31st January 2023. Interestingly, the Economic Survey used to part of the Union Budget till the year 1964, post which it was separated and presented as an independent document on the day before the Union Budget. That practice has continued since. The Economic survey updates the progress on the various macro parameters like GDP growth, external trade, inflation, fiscal deficit and government revenues during the ongoing fiscal (FY23 in this case). The Economic survey also provides guidance for the next year (FY24 in this case). It is a document that, in a way, sets the tone for the Union Budget document.

GDP was a story of resilience amid headwinds

For FY23, Indian economy is expected to grow GDP at 7.0% as already explained in the First GDP estimates presented earlier on 07th January 2023. However, the GDP growth for FY24 has bene pegged slightly lower at 6.5%, with a worst case of 6% and a best case scenario of 6.8% for FY24. The real story in the GDP basket is the long term triggers. GDP growth had lagged between 2014 and 2020 due to the bank balance sheet stress, which had restricted the flow of credit to industry and services. Strategically, long term gains have been visible from progress on ease of doing business, bankruptcy code and product linked incentives (PLI scheme). But a silent booster to growth came from stronger bank balance sheets which resulted in pick up in credit cycle. Formalization of the economy also helped GDP growth.

Fiscal deficit deeper, but normalizing rapidly

It was touch and go in FY21 with the fiscal deficit touching a high of 9.5% due to COVID fiscal boosting measures. That was brought down to 6.9% in FY22 and further to 6.4% in FY23. The Budget will announce a fiscal deficit for FY24, but there is confidence that the target for FY24 would be below 6%. That is a good move towards financial discipline, although still far from the FRBM target of 3.5% fiscal deficit / GDP ratio. One factor that can support a lower fiscal deficit is strong revenue growth. H1FY23 revenues grew 15.5% yoy while monthly GST collections stabilized around Rs1.50 trillion. In addition, higher income levels and output resulted in higher collections of income tax and corporate tax. The overall tax revenues for FY23 are expected to be Rs4 trillion above the target, giving a huge comfort zone to policy. At a qualitative level, the focus of spending in FY23 was on capex, rather than revenue spending.

Hitting inflation, without hitting growth

RBI, in the interest of monetary convergence, adopted a monetary policy similar to the global central banks. Monetary tightening was the name of the game. RBI could not afford to lag behind on monetary tightening. In 2022, even as the US Fed tightened rates by 425 basis points, RBI tightened by 225 basis points. Indian government compounded monetary measures with fiscal measures like cutting import duties on critical inputs. The bigger challenge was to ensure that inflation was controlled without hitting growth. Two things helped Indian economy in FY23. There was continuous rise in housing demand and the housing price index (HPI). Secondly, banking asset quality and capital adequacy improved sharply to 5.0% and 16% respectively. India is pegged by the IMF to be the fastest growing large economy over the next 2 years.

Soft strategies behind the hard numbers

Growth is always about hard numbers, but behind the hard numbers are the soft realities that make the number happen. In FY23, India had that in plenty. During 2022-23, social sector spending by the government stabilized at 2.2% of GDP. Gross enrolments in primary schools improved sharply while out of pocket spending on health is down drastically. Let us not forget that India administered record 220 crore COVID vaccines. This year, India achieved 40% installed power capacity from non-fossil fuels; well ahead of schedule. Emission rates could be down 30% by FY30, while the National Green Hydrogen Mission has pledged to make India energy independent by 2047. Green hydrogen capacity is estimated at 5 MMT by 2030, apart from renewables investment of $78 billion since 2016.

Agriculture, food management, industry and services

Interesting data emerged on the primary, secondary and tertiary sectors.

1. On agriculture, successive budgets focused on remunerative MSP for crops, alternate income streams for farmers, private investment in agriculture and institutional credit. This resulted in agriculture growth stabilizing at 3.5% to 4.0%.
2. GVA of industrial sector in H1FY23 was 3.7%; a good 90 bps higher than the 10 year average. PMI manufacturing is on expansion mode for 18 months since July 2021. India is now the second largest manufacturer of mobile phones, thanks to PLI scheme.
3. Services regained its charm in FY22 growing at 8.4% and expected to grow 9.1% in FY23. Credit to services grew 16% while FDI flows into services sector stood at $7.1 billion in FY22. The bounce comes from contact intensive sectors like hotels, tourism and trade. 

One must add here that physical and digital infrastructure have also played a role in this growth. Macro progress of Indian economy has been impressive despite big challenges in the last few years like COVID-19, economic contraction, Ukraine war, relentless inflation and the pernicious impact of too much tightening.