Indian economy is an oasis of economic growth in this year 2023

Madrid. India’s potential growth is 6% in 2023, driven by domestic demand. Together with China, it will account for half of global growth this year. India’s recently announced budget for the fiscal year 2023-2024 aims at gradual fiscal consolidation and continues to focus on increasing capital investment. This implies that in the short run, its current account deficit will be higher.

Hence, we remain cautious on the Indian Rupee, keeping in mind the recent concerns over Adani Group companies. -Gautam Adani is the richest Indian in Asia and fourth richest in the world, but he has lost much of his fortune after being accused of money laundering and dealing with his business enterprise – and the impact on foreign investor confidence. With its growing population and inadequate infrastructure, India’s medium-term capital expenditure financing needs are high. Given the high public debt and the need to pursue fiscal consolidation, the country will need more foreign capital inflows.

India has been one of the bright spots in growth this year. Its economy, driven above all by domestic demand, continues to recover from the effects of the pandemic. Both manufacturing and services PMIs showed resilience and industrial production even rose in December (Chart 1). Although growth will decelerate now as financial conditions are tighter than last year, its growth potential will be around 6%.

PMI indices suggest continued strong expansion

Headline inflation eased to 5.7% in December as food prices eased, suggesting that the Reserve Bank of India (RBI) may adjourn its next meeting this week. Furthermore, while exports of goods have been affected by the global slowdown in the manufacturing sector, exports of services—mainly IT—continue to flourish (Figure 3).

The government’s budget for 2023-2024 – announced last week and due to start in April – suggests a modest fiscal consolidation this year., a deficit of 6.4% of GDP in 2022-2023 is 5.9% this year. In the budget speech, the medium-term fiscal target of achieving a deficit of 4.5% in the fiscal year 2025-2026 was reiterated.

The budget focuses on increasing investments – more than 30% per annum –, while reducing subsidies for fertilizers and food. While this is good news for medium-term growth, it will also weigh on the current account balance. The current account deficit is likely to be close to 3% of GDP in 2023.

The Reserve Bank of India has started replenishing the foreign exchange reserves it used up last year

While a weaker US dollar should support emerging market currencies, we are more cautious on the Indian Rupee (INR).. A significant current account deficit is a factor. Another important factor is the Reserve Bank of India’s (RBI) purchase of foreign exchange to replenish its reserves. A final factor is the high level of holdings of Indian stocks by foreign investors, which has increased significantly since the start of the pandemic.

Adani Group’s recent worries may weigh on sentiments of foreign investors, and may affect the INR in the short term. However, India’s inclusion in the bond index – which has been postponed since last year without an end date – will encourage capital inflows and support the INR.

India’s population will surpass China’s this year

In the middle ages, the Capex India’s focus will continue. This year, India will overtake China as the world’s most populous country (Figure 3).. According to UN Sustainable Fertility Projections, India’s population will reach 1.6 billion by 2040. At the same time, India’s urbanization rate is expected to slow to 35% in 2021 (Figure 4). China’s current rate of urbanization has almost doubled. China’s urbanization process over the past 20 years has been one of the main sources of growth.

As population shifts from subsistence agriculture in rural areas to manufacturing and service sectors in cities, productivity increases. Urban development makes it possible to improve both productivity and quality of life. The World Bank indicates that by 2036, 600 million people will live in India’s urban cities, accounting for 40% of the population.. It also suggests that India’s infrastructure development will require $55 billion annually for the next 15 years.

India has a long road to urbanisation

Where will that funding come from? The Indian government has emphasized capital expenditure at the central and state levels. The increase in investment expenditure has been substantial and has helped keep the budget deficit and overall fiscal deficit high. Public debt is already high, at 85% of GDP, yet the national fiscal model remains fairly stable, based on the statutory liquidity requirement (or reserve requirement) for banks. However, higher government borrowing may crowd out private investment, so India needs more foreign investment to fund its capex needs.

Foreign direct investment in 2022 will be about 50,000 million dollars, 190,000 million Chineseto do India is chairing the G-20 this year and could use the opportunity to attract foreign investment, but further reforms are needed to ease FDI (Foreign Direct Investment) control and administrative barriers.

Mali Sivakul J. Safra Sarasin is an emerging market economist at Sustainable AM.