Tough days ahead. Year in review: Domestic demand steadied the ship, but 2023 may still prove turbulent

If there is one big highlight of 2022 on the economic front, it is the way the Indian economy demonstrated resilience in navigating the storm of global headwinds emanating from the Russia-Ukraine conflict, the surge in commodity prices, and the impact of tightening global monetary policy cycle. 

The strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies, but this is no time to let one’s guard down and continued vigilance is required as adverse global developments in form of further tightening of interest rates, relatively higher commodity prices could persist in 2023 as well. 

This resilience came largely from robust domestic demand coupled with some astute macroeconomic management by policymakers and the Reserve Bank of India. The rupee may have in calendar year 2022 seen depreciation against the US dollar from a low of ₹74 to about ₹83 now, but it has shown strength against other leading currencies. 

Fading tailwind

The Indian economy will see a further slowdown in 2023-24 due to the challenging external environment, but the solid domestic demand scenario could well be the buffer against a deeper downturn and may help partly offset the impact of rate hikes, a slowing global economy, and the need to reduce the balance-of-payments deficit. 

In 2023, though there is going to be no threat to India’s status of being the fastest-growing large economy in the world, but there will be challenges like the need to create meaningful jobs, further boost consumption among the common man, and bring back animal spirits of the private sector. However, the Government’s efforts of pump-priming the economy with a boost to public investment through a sharp increase in capital expenditure is expected to keep the growth momentum intact in 2023 as well. 

Already Finance Minister Nirmala Sitharaman has dropped a hint that the upcoming Budget would keep the spirit of the earlier editions and was unlikely to reverse the reformist credentials of the current dispensation. 

Andrew Wood, Director, Sovereign & International Public Finance Ratings, S&P Global Ratings, said that the sovereign is benefiting from a period of rapid nominal GDP growth and buoyant revenues. These dynamics are helping to stabilize key debt metrics including the debt-to-GDP ratio, and the Government’s interest burden, albeit at still-elevated levels, he said. “While this tailwind will fade heading into FY24, we still expect India to achieve solid growth next year,” Wood said.

Challenging external environment

“India bears some risks associated with the expected global slowdown, as well as higher interest rates and inflation, especially as tighter monetary policy continues to work its way through the system. However, we expect that its predominantly domestic-oriented economy and solid demand dynamics at home will act as a buffer against a deeper downturn,“ he said.

A challenging external environment will affect India’s economic outlook through different channels. However, the economy is well positioned to ride on the large domestic market and is relatively less exposed to international trade flows. Given the strong foreign investor interest in India, the current account deficit is adequately financed by improving foreign direct investment inflows and a solid cushion of foreign exchange reserves.

Madan Sabnavis, Chief Economist, Bank of Baroda, however, had a different take on India’s macroeconomic situation and resilience. He said that, numerically, India may grow 6 per cent plus in 2023-24, but it is not that the country is accelerating or doing very well. “Optically, we are doing better but fundamentals on the external side will get affected”, he said.

Impact on export

There is an advantage that India is doing better but the fact is the overall amount of money flowing into India in terms of investible funds will come down and “this will affect us on the investment front. Exports will see further slowdown”, he said.

“To say India may be in a sweet spot or in a bright spot may be an oversimplification. We are also going to get affected by slowing exports and lower quantum of investment flows— people will become cagey in making international investments if inflation worries persist amid global slowdown,” Sabnavis said.

So far the impact of the global downturn in India has been less severe. The kind of buoyancy in tax revenues one saw in 2022 cannot be taken for granted in 2023 as persistent inflation has eaten up incomes and there is a lot of uncertainty on jobs. 

The challenges on the domestic front in terms of reform agenda is going to be far more important for policymakers. T