India’s economy appears to be on an upward trajectory, marking a positive turn in its financial landscape. Several factors contribute to this optimistic outlook, including policy reforms, technological advancements, and global economic trends. The government’s efforts to streamline regulations and promote ease of doing business have created a more conducive environment for both domestic and international investors. Additionally, the country’s embrace of digital transformation has opened new avenues for growth, fostering innovation and efficiency. While challenges persist, such as income inequality and unemployment, the overall momentum suggests a promising future for India’s economic development. It is crucial for policymakers to continue fostering a balanced and inclusive growth agenda to ensure the benefits are shared across all segments of society.
Context
India is likely to grow at a faster-than-expected pace despite the conflict in West Asia due to the near normal monsoon, government’s thrust on capital spending and increase in credible borrowing.
Decoding the editorial: Status of Indian economy
- The International Monetary Fund has recently upgraded India’s GDP growth forecast to 6.3 percent for 2023-24, up 40 basis points from its April forecast.
- The RBI’s forecast remains unchanged at 6.5 percent.
The reasons for optimism
- The monsoon:
- While the overall rainfall was 6 percent below the expected during the monsoon season (due to 36 percent deficit rains in August), the spatial distribution is quite even.
- Out of 36 states/UTs, 29 received normal/above-normal rains.
- The SBI Monsoon Impact Index, which considers the spatial distribution, has a value of 89.5, faring much better than the full season index value of 60.2 in 2022.
- The thrust on capital expenditure continues:
- During the first five months of the current year, the capital expenditure of the states as a percentage of the budgeted target is at 25 percent, while the Centre’s is at 37 percent.
- Nearly all states are on a spending spree, with Andhra Pradesh leading the pack, spending as much as 51 percent of the budgeted amount.
- The robust new companies’ registration:
- It depicts strong growth intentions.
- Around 93,305 companies were registered in the first half of 2023-24 as compared to 59,241 five years back.
- The average daily registration of new companies increased to 622 in 2023-24 (an increase of 58 per cent) from 395 in 2018-19.
- The continued traction in credit growth:
- All scheduled commercial banks’ (ASCB’s) credit growth (year-on-year) has been accelerating since early 2022.
- If the 2023-24 trends are included, the incremental growth for the banking system for the current decade ending March 2024 could be close to 1.9 times higher than the last decade.
- The ASCB data for the period 2000-2010 indicates that bank credit grew at an average of 1.86 times of nominal GDP growth, during a period of high growth. However, in 2010-2020, the relationship weakened, and credit to GDP growth declined to 0.99 times, largely because of the severe asset quality issues of banks post the 2008 global crisis. The relationship broke down during the pandemic years of 2020-21 and 2021-22 as DP contracted.
- In 2023-24, the credit to nominal GDP ratio may end up being around 1.7 times, up from 0.93 times in 2022-23, boosting the flow of funds to the broader economy, and helping to sustain the momentum.
- This incremental growth, even after accounting for the exceptional years of the Covid pandemic, is staggering.
- The driving force behind this credit growth is the rapid formalisation of the economy over the past decade.
- Programmes like Jan Dhan Yojana allow banks to meet the demand for credit for households that were operating outside the formal banking sector.
- Doubts have been expressed about the jump in the outstanding credit card portfolio and the unsecured portfolio.
- However, household debt as measured by credit card outstanding per credit card in India has been either static or declining both in nominal and real terms (after adjusted for CPI inflation) in 2023.
- In fact, through schemes like PM SVANidhi, credible borrowers can have continued access to the financial system in the form of repeat loans, provided that they have a good credit repayment history.
If the banking sector’s indicators are taken as a new normal, India is in for a sustained period of growth.
Frequently Asked Questions (FAQs)
Q: What factors contribute to the upswing in India’s economy?
A: The upswing in India’s economy can be attributed to a combination of policy reforms, technological advancements, and favorable global economic trends. Government initiatives to streamline regulations and promote ease of doing business have played a crucial role in creating a positive environment for investors.
Q: How has digital transformation impacted India’s economic growth?
A: India’s embrace of digital transformation has opened new avenues for economic growth by fostering innovation and efficiency. The increased adoption of technology has not only improved business operations but has also created opportunities for new businesses and industries to thrive.
Q: What challenges does India’s economy still face despite the positive trends?
A: Despite the upswing, challenges such as income inequality and unemployment persist. Addressing these issues remains a priority to ensure that the benefits of economic growth are shared across all segments of society.
Q: How are international investors responding to the positive economic indicators in India?
A: Positive economic indicators and government initiatives have attracted increased interest from both domestic and international investors. The conducive business environment, coupled with a focus on ease of doing business, has contributed to a more favorable perception of India as an investment destination.
Q: What measures should policymakers take to sustain and enhance the current economic momentum?
A: Policymakers should continue fostering a balanced and inclusive growth agenda. This includes addressing challenges such as income inequality, promoting job creation, and ensuring that the benefits of economic development reach all sections of society. Additionally, ongoing efforts to streamline regulations and encourage innovation will play a crucial role in sustaining and enhancing the current economic momentum.
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