India recovery optimism intact; to grow at 7.1-7.6% in FY23

The optimism about India’s economic recovery, although slightly bruised, remains intact, and the country will grow by 7.1–7.6% in FY23 and 6–6.7% in FY24, says a report. The strong domestic demand and steady global investments will ensure India reigns as the world’s fastest-growing economy over the next few years, driving world growth even though major economies brace themselves for a slowdown or possibly a recession, the India Economic Outlook report by Deloitte India shows.

The reason behind strong optimism is believed to be India's domestic demand-driven economy, with consumption and investments contributing to 70% of the economic activity, says the report by Deloitte India economist Rumki Majumdar. The Reserve Bank of India's (RBI) analysis of 10,000 listed companies also shows businesses have seen a steady net profit-to-sales growth over the past year and are sitting on piles of cash. However, supply chain issues and global uncertainties are leading to sporadic growth in investments, though industry and service activities remain robust, shows data.

The government hopes inflation will have minimal impact on India. This week, finance minister Nirmala Sitharaman said targeted transfers have helped poorer households cope with price spikes. She said inflation in India will not push anybody below the lower poverty line of $1.9/day, while only 0.02% and 0.04% of the population will go below the higher poverty lines of $3.3 per day and $5.5 per day, respectively.

Like many other nations, inflation remains a worry for India too. "Inflation, like in many other countries, has been hard on Indian consumers, with low-income households getting disproportionately impacted," says the report. But as mobility improves, consumer confidence seems to be improving, it adds.

"There is an appetite for spending among the top 10 income percentile of the population that has not spent for more than a year and thus is onto revenge buying and travelling," says the report. The positive sentiments are reflected in the number of flights taking off and hotel reservations, which have recorded decent growth. "Revival in business travels and in-person client interactions have also helped the hospitality sector. Furthermore, the number of foreign tourists visiting India almost doubled between January and April this year," the report adds.

The demand for services is skyrocketing as is evident from the PMI numbers, which were at an 11-year high in May 2022. "The industry sector is also holding up well. Demand for electricity in the first six months of the year has been higher than in the past three years. The number of vehicles registered, meanwhile, has reached pre-pandemic levels," the report adds.

The other good news is the government’s capital spending share is going up even as it is cutting down revenue expenses. "India’s gross tax collection has beaten all expectations," says the report, adding that economic boost and better compliance have helped in better revenue. Notably, the total tax collection reached ₹27.07 lakh crore ($356.82 billion) in FY21–22, surpassing the government’s revised target by a substantial margin.

"Improved economic activity and better compliance efforts in taxation have aided in better revenues. The tax buoyancy (which is a measure of growth in tax revenues compared to GDP growth), the simplified tax regime with low rates, comprehensive review and rationalisation of the tariff structure, and digitisation of tax filing is likely to support further capital spending in the future. Higher capital spending on infrastructure and asset-building projects is likely to boost growth multipliers in the medium term."

Moreover, exports — in terms of their contribution to GDP — also bolstered recovery even when all other growth engines were losing steam, says the report, adding that the opportunity to boost exports is "promising". "The manufacturing sector growth looks encouraging as several multinational companies will look for resilience and cost-effectiveness in light of the China Plus One strategy," the report adds.

Due to global uncertainty, economic fundamentals have "deteriorated", as a result, Deloitte India revised its India outlook in March by over a percentage point. "We expect two possibilities, with assumptions around the longevity and severity of the Russia-Ukraine conflict and the pandemic. Global economic growth and disruptions to the supply chain will be other critical determinants."

Also, inflation is expected to remain "stubbornly high", despite rate hikes in FY23 unless the global slowdown causes oil and commodity prices to fall, it adds. India’s retail inflation slightly moderated to 7.01% in June 2022 from 7.04% in May this year, shows government data. This marks the sixth month that retail inflation has remained above the tolerance band of 2-6% recommended by the RBI.

Notwithstanding global uncertainties, inflation and supply chain worries, domestic demand and the desire of global businesses to look for more resilient and cost-effective investment and export destinations, among other factors, will help India ride this tide of headwinds, says the report.