India Economic Outlook: Picking Up Speed
Summary
- India’s strong GDP growth trajectory is propelling the country to become the world’s third-largest economy over the next 5-7 years.
- This is supported by proactive government policies to boost infrastructure spending, with a focus on improving efficiency and productivity.
- Services exports, which have witnessed solid growth of late and expanding in scope beyond IT and BPO services, are tipped to be a key growth driver going forward.
- Longer term, India’s ability to sustain its growth momentum will hinge on a revival of private investment and structural reforms focusing on upskilling its labour force and creating jobs for its young and growing middle class.
India’s growth recovery has been impressive
India’s real GDP grew by a strong 7.2% year-on-year (y-o-y) in the fiscal year to March 2023, after having expanded by 9.1% a year ago. GDP growth in the January-March quarter of 2023 beat expectations, coming in at 6.1% y-o-y against a consensus forecast of 5%, with strong performance noted across multiple sectors, including agriculture (+5.5%), manufacturing (+4.5%), and construction (+10%). Furthermore, fixed capital investment and net exports, in particular services exports, performed well.The World Bank expects India to remain the fastest-growing major economy[1] in the world this year. By 2028, the IMF’s economic projections show that India will become the third-largest global economy after the US and China (overtaking Germany and Japan).[2]
The government has boosted infrastructure spending
The Indian government has planned an unprecedented infrastructure makeover, with an ambition to turn India into a USD5 trillion economy by fiscal year 2025-26.[3] To underpin this objective, a ‘National Infrastructure Pipeline’ of USD1,327 billion was launched in 2019 to close India’s infrastructure gap and to develop infrastructure in an aggregated manner across the country.In keeping with these goals, government capital expenditure has tripled in the last four years, representing a compound annual growth rate of 31% (see Figure 1). For the current fiscal year (FY2023-24), the government has earmarked INR10 trillion (around USD120 billion) for road, railways, energy, and other infrastructure projects.
These capital investments are providing near-term support to the economy and employment, but more importantly, are expected to help “crowd in” private investment and improve India’s economic efficiency and industrial competitiveness over the long term.[4]
Figure 1: Indian government’s capital expenditure expected to increase by 37% in FY2023-24
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Source: Indian budget documents, Press Information Bureau of the Government of India
High-value-added exports from India are on a rise
India’s exports have gained global market share during the pandemic. In particular, the services market share has grown to 4.9% of global exports in December 2022 from 3.7% in December 2019[5].India’s service exports are also moving towards higher value-add, with a focus on value creation and innovation, beyond the cost-effectiveness proposition. Over the past five years, multinational companies have doubled their Global In-house Centers (GICs) or Global Capability Centers (GCCs) in India, that not only handle operations (such as business support and contact centers) and IT (app development, maintenance and remote infrastructure), but also more complex services in an organisation’s value chain, such as product innovation, product development, process automation, and analytics.[6] There has been a notable uptick in professional services beyond IT and BPO, such as management consulting, accounting, advertising and R&D.
Moreover, the accelerated adoption of new technologies globally has also added demand for tech services from India – such as for moving over processes and applications to the cloud infrastructure and for advanced analytics that make use of artificial intelligence and machine learning.
Figure 2: Uptick in India’s services exports
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Source: The Reserve Bank of India
Merchandise exports also gained ground last year though not as tangible as services trade. In particular, exports of mobile phones from India doubled in FY2022-23 from the previous year (albeit from a small base) to USD10 billion.[7] This shows India is accruing more benefits from the reshuffling of the global supply chain. India is also gaining market share in pharmaceutical and medical exports.The near-term outlook of merchandise exports could be clouded by a global growth slowdown and the lagged impact of global monetary tightening. On the other hand, the surge in Indian services exports is underpinned by favourable structural factors that are likely to be sustained over a longer term.
Private consumption and investment have slowed but are expected to recover
As mentioned in our 2023 China and India Economic outlook, private sector investment is crucial in sustaining higher GDP and employment growth in India. Indeed, corporate balance sheets have improved over the past years and businesses in general have the capacity to. Corporate profits have risen as well. However, the momentum in both private consumption and investment has slowed after an initial post-Covid rebound. For instance, the growth of bank credits peaked in October 2022, likely impacted by rising inflation and interest rates, currency depreciation, and a weaker global outlook.Despite market concerns, the macroeconomic environment in India is improving. Headline CPI inflation moderated below 5% since April 2023, with declines across core inflation and food and fuel costs. With CPI inflation within the Reserve Bank of India’s (RBI) 2-6% inflation target range (see Figure 3), the Bank has paused its interest rate hikes since its April 6th monetary policy meeting. The Indian rupee has stabilised as well, given early signs of a US Fed pivot and India’s strong growth potential keeping investor sentiment sanguine. We think the reduced domestic and global economic uncertainties could help revive the business sentiment and demand from the private sector.
Figure 3: Core and headline inflation are moderating
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Note: Shaded area represents the RBI’s 2-6% inflation target range
Source: CEIC, MOSPI
Will India be able to seize its demographic dividend to sustain long-term growth?
The capacity of the private sector and industrial growth to provide jobs for India’s young and growing population remains the key question for the country’s long-term economic outlook.Demographics are on India’s side. It is estimated that India will account for 24% of the worldwide increase in the working-age population over the decade to 2030.[8] Projections from the World Bank show that between 2020 and 2040, India’s population aged 15 to 59 years is expected to increase by 134.6 million.[9] These large numbers of potential workers and consumers are expected to be a significant driver for India’s growth, provided the economy can create enough productive job opportunities.
The growing services sector is an example where India is leveraging it’s demographic dividend. Of about 10 million people adding to the labour force every year this decade, around 2.1 million are English-speaking graduates with backgrounds in science, technology and engineering[10], which gives this demographic cohort a competitive advantage in global tech service jobs. The Indian services industry has also developed strong collaborations with global tech companies for training employees where skill gaps exist.
However, India also needs to cater for a vast lower-skilled labour force. Traditionally much of the rural workforce has been employed in agriculture (see Figure 4), but the younger rural workforce is also aspiring for better career opportunities and living standards. Currently, India’s agricultural sector is still plagued by low productivity and income, as well as issues around highly fragmented land ownership and elevated health risks.[11]
The government is focussing on creating structural capacity in labour-intensive manufacturing and construction sectors to absorb this young labour force. For this, the government aims to not only increase fiscal spending and incentivise private-sector manufacturing but also improve the employability of workers by ensuring they have the right skills for those jobs. As discussed earlier, the government has committed more than USD1 trillion in infrastructure spending between FY2019-20 and FY2024-25, which is expected to increase the number of construction jobs and also have a multiplier effect on economic growth.
In order to build manufacturing capacity, the government is incentivising frontier manufacturing industries through its production-linked incentives (PLI) scheme for 14 industries, including electronics, pharmaceuticals, automobiles and solar cells. The PLI scheme is estimated to have the potential to create six million jobs over five years, starting from FY2021-22.[12] The government has also established special economic zones offering tax incentives, streamlined regulations and expanded infrastructure to bring in foreign investment, as well as encouraging private-public partnerships. Over the past few years, India has significantly cut red tape, climbing in the World Bank’s Ease of Doing Business rankings to 63 globally in 2020, from 130 in 2017.[13] These measures have contributed to increasing foreign investments, most notably in electronics manufacturing, from Foxconn, Micron, Samsung, Xiaomi and Oppo, which is supporting labour market mobilisation into manufacturing.[14]
Figure 4: Number of Workers Employed, by Sector
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Source: Niti Aayog Discussion Paper: Workforce Changes and Employment, March 2022
In tandem with job creation, improving employability through education, vocational training, upskilling and health benefits are another area of focus for the government. Under the government’s Skill India Mission and other skill development programs in collaboration with the private sector and international development agencies, 55.6 million Indians have undergone skill training since 2015[15], in skills varying from micro-entrepreneurship to machinery operation and digital literacy.In addition to these structural reform efforts, the government aims to reduce frictional unemployment by creating a unified national database of unorganised workers (e-Shram portal), to help connect the labour force with employment, training and apprenticeship opportunities, as well as with social security and welfare benefits. As of April 2023, 288 million workers have registered on the portal, of which 52.75% are female.[16]
Providing productive employment opportunities at scale is no mean task and is certainly not without challenges. Youth (ages 15-29) unemployment rates as of 2022 are still high at 12.4% (although these have declined from 17.8% in 2018). Moreover, labour participation rates, particularly for women, are worryingly low at around 25%[17], and these issues need to be addressed. The success of incentive policies in expanding the manufacturing sector also remains to be seen.
Much change is needed in India’s economic and social structures for the country to fully harness its demographic dividend.
[1] Indian economy continues to show resilience amid global uncertainties, World Bank, 4 April 2023
[2] Based on the projections in the IMF’s World Economic Outlook database, April 2023.
[3] India’s ‘eye-watering’ 1.7pc spend on transport upgrade to set stage for $5 trillion economy, The Economic Times, 21 March 2023
[4] The Missing Piece in India’s Economic Growth Story: Robust Infrastructure, S&P Global, August 2016
[5]How India has transformed in less than a decade, Morgan Stanley, 24 May 2023
[6] Global Capability Centers (GCCs): Driving a Holistic Transformation of The Future-Ready Enterprise, Polestar, 29 July 2022
[7] India: Side-stepping a slowdown? HSBC Global Research, 21 April 2023
[9] Databank: Population Estimates and Projections, The World Bank
[8] [10] Reaping the demographic dividend, EY India, 11 April 2023
[11] PERCEPTION OF RURAL YOUTH TOWARDS FARMING AS AN OCCUPATION IN PUNJAB, Indian Council of Agricultural Research, 21 June, 2022
[12] Employment in major industries increased over the last three years according to the PLFS data, Press Information Bureau, 16 March 2023
[13] The World Bank Doing Business Archive
[14] How mobile manufacturing made the most of “Make in India”, Live Mint, 11 August 2019
[15] Let’s step up strategic efforts to mobilize India’s labour potential, Live Mint, 17 October 2022
[16] Labour Minister launches new features on eShram Portal to enhance coverage for unorganised workers, Outlook India, 26 June 2023
[17] Annual Report: Periodic Labour Force Survey (PLFS) for July 2021-June 2022, Ministry of Statistics and Programme Implementation
