Growth moderated to 7.2 percent in FY22/23. The post-COVID rebound faded, and the government consolidated recurrent spending. Growth is projected to decline further in FY23/24 as it reverts
to its potential rate (6-6.5 percent), with external downside risks. Extreme poverty hovers around 11 percent, while moderate poverty is around 45 percent.
To increase potential growth and reduce poverty, structural reforms should seek to improve human capital, key infrastructure, the business environment,and jobs, particularly for women.
Between 2000 and 2019, India enjoyed rapid economic growth averaging 6.6 percent per annum. GDP per capita more than doubled and extreme poverty (at $2.15 2017 PPP) fell from 39.9 percent in 2004to 12.7 percent in 2019. This strong performance reflected a demographic dividend, steps taken to integrate India into the global economy and improve the business environment, and prudent monetary and fiscal management. Output contracted by 5.8 percent in FY20/21 due to the COVID-19 shock but rebounded swiftly by 9.1 percent in FY21/22 and returned to its pre-pandemic level. Extreme poverty declined by
3.4 percentage points in FY22/23 relative to FY20/21, to 11.3 percent. Meanwhile, moderate poverty (at $3.65 2017 PPP – the threshold typically used for L-MICs) declined by 4.6 percentage points to 45.1 percent. Even though growth helped reduce monetary poverty, 16.4 percent of the population faces deprivations that classify them as multidimensionally poor, and one
in three Indians is malnourished.
Consumption inequality remained stagnant at 0.35 (using the GINI coefficient).
Growth decelerated to 7.2 percent in FY22/23 and is projected to slow to 6.3 percent in
FY23/24, with external downside risks. The moderation of growth reflects base effects
(as the post-COVID rebound fades), weak external demand, and domestic price pressures. Risks include slower-than-expected global growth, higher oil prices, and more persistent inflationary pressures. However, they remain manageable given India’s large and diversified economic base and
significant reserves buffers. For India to achieve the national goal of becoming a
high-income country by 2047, real growth would need to rise sustainably to around
8 percent per annum on average. This requires more ambitious structural reforms to enhance the quality of education, generate more and better jobs (in terms of remuneration, stability, and labor conditions),
increase the economic participation of women and youth, improve infrastructure,
and strengthen the business environment.
Recent developments
Real GDP growth decelerated to 7.2 percent in FY22/23, from 9.1 percent in the previous year, mainly due to waning base effects. Private consumption and investment growth moderated as the post-pandemic catch-up tapered off, and public consumption stagnated due to fiscal consolidation of recurrent spending (though public investment expanded). Total consumption moderated further, and exports shrank, in Q1 FY23/24 (April-June), but investment -especially public investment- continued to grow at a robust pace. The services sector drove growth on the supply side, with fast expansion in high-contact services like retail trade,tourism,and transportation.
To address inflationary pressures (inflation reached 7.8 percent in April 2022) the RBI’s Monetary Policy Committee raised the policy rate by 250 basis points in FY22/23 and held the rate unchanged at 6.5 percent since February 2023. Both headline and core inflation trended down until May 2023, to 4.3 and 5.1 percent, respectively. However, recent abnormal monsoon rainfall pushed up food prices, driving headline inflation to 7.4 percent in July 2023.
The increase in food prices disproportionately affects the poor and could aggravate malnutrition which already affects onethird of the population. Urban unemployment fell to 7.2 percent in
FY22/23 from 9.8 percent in FY21/22, but the share of regular salaried workers declined, with possible implications for income stability. The rural labor market showed signs of continued distress as demand for employment under the rural employment guarantee program exceeded pre-pandemic levels in FY22/23, and real earnings remained stagnant. One in three youths aged 15-29 and over half of the young women were outside employment, education, or training in FY21/22. The general government fiscal deficit narrowed to 9.0 percent of GDP in FY22/23, thanks to strong tax revenue growth (15
percent) and consolidation of the central government’s recurrent spending, through
the gradual withdrawal of remaining pandemic-related measures. This created room to ramp up capital expenditure while decreasing total spending. Healthy growth and a narrower fiscal deficit
brought public debt down from 84.8 percent of GDP in FY21/22 to 82.9 percent in FY22/23. The current account deficit widened to 2.0 percent of GDP in FY22-23.
Services exports and remittance inflows increased, but the balance of trade in goods deteriorated with rising global crude oil prices. Net foreign direct investment fell below 1 percent of GDP, from 1.2 percent in FY21/22, and net portfolio investment turned negative. As a result, foreign exchange reserves fell to US$578 billion, equivalent to 7 months of
import cover.
Outlook
Growth is projected to moderate to 6.3 percent in FY23/24, as consumption growth continues to decelerate, and external headwinds depress foreign demand. Over the medium term, growth should hover around its potential rate of 6.5 percent. Investment growth is projected to remain robust, supported by high public investment and improved corporate and banking sector balance sheets. The current account deficit is expected to narrow to around 1.5percent of GDP over the forecast period as
commodity prices decline relative to FY22/23, while services exports and remittances remain buoyant. Foreign exchange reserves are projected to remain adequate at around seven months of imports.
Headline inflation should decline over the medium term as domestic demand moderates and global commodity prices normalize. Inflationary pressures from food prices
will abate gradually as domestic supply constraints are resolved.
The overall fiscal deficit is projected to narrow, bringing down public debt slowly to around 82 percent of GDP over the medium term. Revenues are projected to return to pre-pandemic levels as a share of GDP, thanks to improving compliance and healthy corporate profits. Current spending should continue to fall as a share of GDP, with capital spending elevated at
over 5 percent of GDP.
However, any fiscal measures to mitigate the current inflationary pressures may affect this projection.
Growth should still drive further declines in extreme and moderate poverty, to 11.2percent and 44.4 percent in FY23/24, respectively. However, the pace of poverty reduction will depend on the inflation trajectory and how growth translates into incomes for the most vulnerable.
