India learns to make lemonade from lemons

Not all headwinds are meant to be challenges. For instance, globally, nations and multinationals are emphasizing resilience in, diversification of, and securing their supply chains in light of geopolitical developments and global exigencies. India presents huge potential and opportunities as an export hub and investment destination in the manufacturing and services space. India’s recent trade agreements are aimed at integrating the manufacturing sector with the global supply chain. Consequently, there has been a healthy rise in foreign direct investment (FDI) equity flows from Japan, Singapore, the United Kingdom, and the United Arab Emirates in H1 FY 2022–23, even as FDI from the United States fell. This points to a rising confidence among global investors to invest in India and India’s inflows are becoming more diversified.

More so, low asset values have led healthy companies to consolidate positions and enter new segments.

Defying trends, India registered record mergers and acquisition deals in 2022, with the biggest transactions seen in banking, cement, and aviation. Many conglomerates entered new businesses, while brick-and-mortar companies partnered with technology firms.

India’s trade with Russia has shot up post the Russia-Ukraine war. According to Reuters, imports of the top five principal commodities have increased since the war as India imported these commodities at discounts. India also benefits from the fact that its refineries are best suited to process Russian oil.

What to expect in 2023

We believe the path to recovery for the Indian economy will be lengthier with consumer spending moderating owing to pressures from inflation and higher borrowing rates. Investments will likely be the biggest growth drivers, primarily driven by the government sector capital spending, while the private sector may take some time to join the investment bandwagon. The private sector will, however, likely continue with focused spending on select projects in the meantime, as was observed last year.

Our key assumptions for the forecast remain in line with what they were in the previous outlook (See the sidebar, “Key assumptions” for more information on our optimistic and pessimistic scenarios). Given that the economy turned out to be weaker in H1 FY 2022–23 than we had anticipated, we have revised down our outlook by 0.2 percentage points this financial year. The downside risks for the currency and the current account balance have also increased. Unfortunately, with each revision, the actual GDP gets further away from the no–COVID-19 GDP trend, indicating the extent of the damage that may be difficult to reverse.

Expectations from the budget this year.

The budget is around the corner and while we have a long wish list, here are our four key expectations.

Improve supply chain to control inflation: While there will be a continued fight against inflation, India needs sector-specific targeted efforts to manage supply, and therefore, inflation. For instance, a large part of inflation is due to food prices, and the government must make efforts toward building infrastructure to optimize the food and agribusiness supply chain. Developing market linkages by identifying and connecting farmers with buyers and facilitating contract negotiations between the two could be critical.

Incentivize the services sector for job creation: The government’s focus has rightly been on sectors such as infrastructure, construction, and manufacturing that create jobs for workers across all skills. However, the services sector has huge potential—be it in retail, trade, or information technology. So, while India continues its focus on various schemes such as Product Liked Incentive to promote manufacturing and sunrise sectors, it will have to also focus on the services sector where India is competitive and has a comparative advantage. An effort toward building global in-house centers of the world and adopting agility in doing business could revive the services sector and create employment opportunities.

Find new sources of revenue: The government will have to support growth by boosting spending to cushion the impact of global exigencies as well as the global economic slowdown. Besides, the government will have to continue the momentum in infrastructure spending to ensure jobs and asset creation. The challenge would be to raise resources for the expenses it incurs. While tax revenues have been strong, thanks to the economic revival and inflation, the government will have to monetize assets so that it can front-load its expenses this year. While the government exceeded its asset monetization target in FY22, it is likely to miss the target for the ongoing fiscal. Going forward, it will have to focus on states with large monetization bases, identify potential assets that can be monetized, and also bring in strategic partnerships with private players to allow private capital to flow into select sectors.

Prepare India to bounce back when the global economy recovers: The government needs to focus on completing ongoing infrastructure projects and boosting sectors with strong linkages and multiplier effects. While progress in several infrastructure projects has been good so far, highway networks are yet to gain momentum, and progress in power and energy has been modest. The emphasis should be on improving financial inclusion and technology connectivity beyond Tier-1 cities. Furthermore, focusing on supporting the micro, small, and medium enterprises sectors could help India achieve all-inclusive growth.

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