OECD Economic Outlook, Volume 2023 Issue 2

India

Following a strong outcome in FY 2022-23, real GDP growth is projected to slow to 6.3% in FY 2023-24 and 6.1% in FY 2024-25 on account of adverse weather-related events and the weakening international outlook. Surging services exports and public investment will continue to drive the economy. Inflation will decline progressively, with corresponding improvements of purchasing power. This, along with the end of the El Niño weather pattern, productivity gains from recent policy reforms, and improved global conditions, will help economic activity to strengthen, with projected real GDP growth of 6.5% in FY 2025-26.

Monetary policy easing is assumed to start in the second half of 2024, supporting business investment and discretionary household spending. Government investment will remain at high levels. Nevertheless, further fiscal consolidation is expected, which will increase financial space for the private sector. The challenges that remain to eradicate poverty, mitigate climate change, and accelerate income convergence require substantial fiscal efforts to mobilise additional resources and strengthen regulations, institutions, and standards to steer consumers towards inclusive and sustainable practices.

Domestic demand is sustaining economic activity

FY 2023-24 started with strong growth driven by public investment and private consumption. However, the global economic slowdown has hit merchandise trade. There are differences along sectoral and territorial lines: services (finance and export-oriented segments in particular) are more buoyant than manufacturing and urban areas are performing better than rural ones. Recent economic statistics are sending mixed signals. According to the income-based national accounts, real GDP grew by 7.8% year-on-year in the April-June quarter, whereas it grew considerably less in the expenditure-based account. Similarly, recent market data for consumption suggest that car sales and air traffic are doing well, but commercial vehicles and tractor sales, as well as passenger rail and cargo aviation traffic are either retrenching or growing slowly. The RBI and PMI industrial surveys indicate that firms see business prospects improving, but other forward-looking surveys are less upbeat concerning demand conditions. Tighter financial market conditions and some softening in commodity prices, which reduces the overall demand for working capital loans, are moderating banking credit growth.

India: Economic growth and inflation indicators

1. Real GDP per capita is based on GDP in constant prices (2015 PPP), USD. Quarterly population data are calculated by interpolating annual data. OECD estimates on population data for 2023.

2. OECD seasonal adjustment based on monthly consumer price index and core CPI (index 2012 = 100) from the Ministry of Statistics and Programme Implementation (MOSPI).

Source: OECD Economic Outlook 114 database; OECD Population database; and CEIC.

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India: Demand, output and prices

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India: Fiscal and activity indicators

1. Years represent fiscal years. The debt ratio refers to the sum of domestic and external debt of central and state governments in per cent of GDP. The weighted average maturity is based on the issuance of Government of India dated securities.

2. Including other renewables.

Source: Reserve Bank of India; and Ministry of Power.

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Domestic growth prospects are strongly influenced by global developments, even if India has a relatively low trade-to-GDP ratio. Over a decade, India’s global export market share has increased, mostly due to services. The current account deficit narrowed in the first half of the calendar year 2023 and the merchandise trade deficit was 12% smaller in value terms in April-October 2023 than in the corresponding period in 2022. India has seized the opportunity to buy heavily discounted Urals oil. Russia’s share in crude oil imports has increased from less than 5% to over one-third.

Monetary policy is tightening, fiscal consolidation remains a priority

Monetary policy tightening is successfully managing inflationary pressures but is also weighing on household consumption and corporate investment. Headline inflation moderated in the first half of 2023, and dropped below the upper threshold of the central bank’s 2-6% target range in September. Food and energy prices remain sensitive to weather conditions and geopolitical tensions. The government has taken additional emergency measures to rein in soaring prices of food staples, including allowing imports of tomatoes from Nepal, selling tomatoes at subsidised prices, and releasing onions from buffer stocks. Banks’ financial results and solvency ratios have improved, helped by more effective regulation and supervision, and increasing the room for manoeuvre for monetary policy. Additional efforts may be needed to speed up activation of recent insolvency reforms and facilitate the exit of non-viable firms. Labour force participation, employment and wage estimates suggest improving labour market conditions, including for women and in rural areas, but given the still large reserves of labourers in rural areas, the risk of a wage‑price spiral is minimal.

Fiscal consolidation remains a top policy priority given the need to maintain public debt at sustainable levels. As a share of GDP, public debt has grown by 15 percentage points since FY 2018-19 though the average maturity of the debt has lengthened. Given reasonable assumptions about inflation and interest rates, halting the increase in the debt-to-GDP ratio requires either above-potential GDP growth, or a considerably lower deficit than recently attained. Over the next two years the government targets are projected to be achieved, but greater efforts to control expenses are needed at the state level, along with policy interventions to narrow the tax gap. This requires broadening the tax base for corporate and personal income taxes, simplifying the goods and services tax (GST) rate structure, and closing exemptions and loopholes. Efficiency gains can also be achieved by partial or complete divestiture of state‑owned enterprises.

The economy will be resilient despite global tensions

Real GDP growth is expected to slow to 6.3% in FY 2023-24 and 6.1% in FY 2024-25, before rebounding gently in FY 2025-26. With slower growth, inflation expectations, housing prices and wages will all progressively moderate, helping headline inflation converge towards 4.2%. This will allow the RBI to start lowering interest rates from mid-2024 to 5.5% by the end of 2025. The trade restrictions imposed in 2022 to fight inflation (including export bans on various rice varieties) will be withdrawn, helping export growth to recover. The current account deficit will remain within manageable levels.

Risks are tilted to the downside. While indicators suggest that India’s growth is stable for now, there are strong headwinds from heightened global uncertainty. In addition, the lagged impact of domestic policy tightening will continue to be felt, coupled with the disappointing dynamics of some socio-economic indicators, such as consumer goods’ sales, in rural areas. A below-normal monsoon season could also impact growth negatively. An additional risk is the acceleration of portfolio capital outflows, with consequences for the exchange rate, inflation, and monetary policy.

Fiscal policy can help accelerate the transition to net-zero emissions

The fight against environmental degradation and climate change requires huge investments and behavioural changes. Stronger revenue mobilisation and further improvement in public expenditure efficiency can free resources for investment in cleaner and energy‑efficient infrastructure. In order to encourage renewable energy, targeted subsidies could be increased. Taxes on emissions would discourage dirty energy, with the added benefit of diminishing the reliance on imported fuels. On top of fiscal interventions, public campaigns to encourage the adoption of sustainable lifestyles have proven their effectiveness. The impact on energy consumption, costs and emissions of measures proposed by the government’s Lifestyle for Environment (LiFE) initiative is potentially substantial and could build on India’s success in achieving its target of producing 40% of electric capacity from non-fossil-fuel sources. Investing in green skills and capabilities, facilitating the international transfer of green technologies, and strengthening regulations, institutions, and standards would mitigate climate change and support growth.