India’s Economy Keeps Getting Better in Mid-2023
After experiencing a rapid economic growth of 7.2% in the fiscal year 2022–23, India’s economic momentum continues to be robust in the first half of 2023. The S&P Global India Services PMI Business Activity Index for July indicates a sustained rapid expansion in both output and new orders, complemented by strong expansionary conditions reported in the July Manufacturing PMI survey.
Furthermore, India has emerged as an increasingly attractive destination for multinational corporations across diverse industries, with foreign direct investment (FDI) hitting a record high of USD 85 billion in the fiscal year 2021–22. Notably, FDI inflows into the manufacturing sector experienced a remarkable 76% year-on-year increase in 2021–22, reaching an impressive level winning over USD 21 billion.
India’s economic growth persists in mid-2023, showcasing ongoing expansion.
Recent economic indicators for India in the first half of 2023 point to ongoing economic expansion driven by domestic demand. Notable highlights include an 11.9% year-on-year increase in steel production and a 10.2% year-on-year rise in steel consumption during the April-June quarter. Commercial vehicle sales surged by 34.3% year-on-year in FY2022–23, while private vehicle sales saw an 18.7% year-on-year increase in the same period.
The Index of Industrial Production, despite its usual monthly volatility, demonstrated a 4.5% year-on-year growth in the April-June quarter, with manufacturing output up by 4.7% year-on-year. Looking at the entire FY2022–23 from April to March, industrial production increased by 5.2% year-on-year, and manufacturing output rose by 4.7% year-on-year.
In FY2022–23, the production of capital goods and infrastructure/construction goods experienced substantial growth at 12.9% and 12.5% year-on-year, respectively. However, consumer durables and non-durables production showed a slower pace, with consumer durables growing by a marginal 0.6% year-on-year and consumer non-durables by 0.5% year-on-year, as reported by the National Statistical Office.
Breaking it down for the April-June quarter of 2023, capital goods production increased by 4.9% year-on-year, and infrastructure/construction goods rose by 14.0% year-on-year. Consumer durables output faced a contraction of 2.8% year-on-year, while consumer non-durables exhibited strong momentum with a 6.7% year-on-year increase.
In July, the seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) held steady at 57.7, aligning closely with the June reading of 57.8. This consistent performance signals a sustained and robust expansion in the manufacturing sector, marking 25 consecutive months of strengthened business conditions.
The latest survey indicates widespread reports of demand improvements, contributing to a significant expansion of new orders in the manufacturing sector. Meanwhile, the seasonally adjusted S&P Global India Services PMI Business Activity Index surged from 58.5 in June to 62.3 in July, reflecting the most substantial increase in output since June 2010. This upturn is primarily attributed to the strength in demand and login new business.
However, India’s exports of goods and services faced a 6.0% year-on-year contraction for the April-July 2023 period. The decline was largely driven by a substantial 14.5% year-on-year decrease in merchandise exports during the same quarter. Despite this, the decline in merchandise exports was partially offset by robust growth in services exports, which rose by 7.8% year-on-year over the corresponding period.
Conditions of rising prices
Cost inflation pressures gained strength in July, marked by an acceleration observed among both goods producers and service providers. At the composite level, input costs experienced the fastest rate of increase in a year. However, the prices charged for Indian goods and services rose at the slowest pace in three months, with rates of output price inflation moderating in both manufacturing and service sectors.
Latest data on India’s consumer price index (CPI) revealed a surge in the headline CPI inflation rate to 7.4% year-on-year in July from 4.8% year-on-year in June. A significant factor contributing to this upturn was a sharp increase in the food and beverages CPI sub-index, rising by 10.6% year-on-year in July, driven by surging vegetable prices and notable increases in cereals and pulses.
Vegetable prices, particularly tomatoes, witnessed a substantial rise, increasing by 37.3% year-on-year in July, following recent declines. Pulses prices also showed a strong increase, rising by 13.3% year-on-year. The overall cereals sub-index, a cause for concern for the Indian government, was up by 13.0% year-on-year.
Despite high energy prices influencing India’s CPI inflation over the past year, there has been some relief in recent months due to easing world oil prices and base-year effects. The fuel and light sub-index increased at a slower pace in July, at 3.7% year-on-year, compared to 3.9% year-on-year in June and a significantly lower 8.9% year-on-year rate recorded in March.
In its August Monetary Policy Statement, the Reserve Bank of India (RBI) increased its projected CPI inflation rate for the current fiscal year (2023–24) to 5.4%, up from the 5.1% year-on-year projection in the June Monetary Policy Statement. The near-term trajectory of CPI inflation is projected at 6.2% year-on-year for the July-September quarter, 5.7% year-on-year for the October to December quarter, and moderating to 5.2% year-on-year in the January-March quarter of 2024.
The RBI highlighted potential disruptions to food production due to adverse weather conditions, as well as risks associated with a skewed south-west monsoon and geopolitical hostilities contributing to upward pressures on food prices. Despite these challenges, the RBI’s projection for real GDP growth in fiscal year 2023–24 remained unchanged at 6.5%, citing resilience in domestic economic activity based on high-frequency indicators.
Investment from overseas
India has experienced a rapid surge in net new foreign direct investment (FDI) in recent years, achieving a record level of USD 85 billion in the 2021–22 fiscal year, following inflows of USD 82 billion in the previous fiscal year 2020–21. This substantial growth is noteworthy compared to the modest FDI inflows of USD 4 billion in the 2003–04 fiscal year.
The sustained strength of FDI has played a crucial role in reducing India’s external account vulnerability and significantly contributing to the augmentation of the country’s foreign exchange reserves over the past decade.
Technology-related FDI has been a key driver of the remarkable FDI inflows, particularly in the Computer Software and Hardware sector, which secured the largest share of foreign direct investment equity inflows at around 25% in the 2021–22 fiscal year.
Major US technology firms, such as Google and Facebook, have been instrumental in this surge. In 2020, Google established the “Google for India Digitization Fund” with plans to invest USD 10 billion in India over seven years. Additionally, Facebook announced a substantial investment of USD 5.7 billion in Jio Platforms, owned by Reliance Industries Limited.
Infrastructure investments have also played a pivotal role, exemplified by the significant USD 3.7 billion deal in 2020 involving Singapore’s GIC and Canada’s Brookfield Asset Management in the acquisition of Tower Infrastructure Trust, which holds Indian telecom tower assets.
In the fiscal year 2020–21, FDI from Saudi Arabia experienced a sharp rise, reaching USD 2.8 billion. Notable investments included Saudi Arabia’s Public Investment Fund acquiring stakes in Jio Platforms and Reliance Retail.
Reliance Retail attracted investments from various foreign entities in 2020, including Singapore’s GIC, Tiranga App WINGO, PayTM Fast Game, TPG Private Capital, and US private equity firm Silver Lake Partners.
Analyzing the source of FDI inflows, Singapore, Mauritius, and the United Arab Emirates, alongside the USA, emerged as the top contributors in the fiscal year 2022–23. This underscores the growing significance of India’s economic and investment relationships with global financial hubs in emerging markets, complementing strong ties with advanced economies like the USA, Japan, EU, and the UK. The evolving landscape suggests a promising trajectory for India’s global economic engagement.
Startups Business
The surge in the number of Indian unicorns, denoting start-ups valued at over USD 1 billion, over the last five years has emerged as a significant focal point for foreign direct investment (FDI) inflows into India. As of 2022, there were approximately 107 Indian unicorns, a remarkable growth given that 44 achieved unicorn status in 2021 and another 21 in 2022, according to Invest India, the National Investment Promotion & Facilitation Agency.
This flourishing landscape of Indian start-ups has become a magnet for substantial foreign direct investment, drawing interest from global venture capital and private equity giants such as Blackstone and Sequoia Capital. A standout player in this arena is Japan’s SoftBank, which has emerged as a leading global investor in Indian tech start-ups. Over the past decade, SoftBank has injected an impressive sum of over USD 14 billion into Indian firms, with an estimated USD 3 billion in new FDI in the calendar year 2021 alone.
This thriving ecosystem underscores the dynamic appeal of Indian unicorns, not only as innovative players in the global tech landscape but also as lucrative investment opportunities, attracting significant foreign capital inflows.
Investment in the electronics sector
In 2021, akin to numerous global auto manufacturing hubs, the widespread shortage of semiconductors significantly disrupted the landscape of Indian auto production, leading to substantial constraints in new auto output and sales. Given India’s substantial dependence on imported chips, the Indian government took proactive measures by announcing a substantial incentive package of USD 10 billion in December 2021. The primary objective was to stimulate the development of semiconductor and display manufacturing within India, providing a significant impetus to the industry.
This groundbreaking incentive scheme offers a noteworthy 50% financial support for establishing new semiconductor fabrication and packaging plants, alongside display plants in India. The announcement has sparked initial discussions among major international electronics firms, signaling the potential establishment of production facilities in the country. Notably, Micron has already disclosed plans to construct a semiconductor assembly and test facility in Gujarat, with construction scheduled for the fiscal year 2023–24.
India’s robust capabilities in semiconductor design are evident, with an estimated 24,000 design engineers actively contributing to the sector. The federal government is collaborating with state governments to establish high-tech clusters dedicated to semiconductor fabs and display fabs, further solidifying India’s position in semiconductor technology.
Over the past decade, India has witnessed remarkable progress in nurturing its domestic electronics manufacturing industry. The total electronics manufacturing sector has experienced significant growth, escalating from USD 30 billion in 2014–15 to an impressive USD 75 billion in 2019–20. The surge in electronics exports has been catalyzed by the rapid expansion of mobile phone exports. Major global electronics firms strategically increased their mobile phone production in India, leading to exports surging from USD 0.2 billion in the fiscal year 2017–18 to USD 3.2 billion in the 2020–21 fiscal year. This upward trajectory continued, reaching USD 5.5 billion in the 2021–22 fiscal year. Encouragingly, projections from the Indian Cellular and Electronics Association indicate a doubling of mobile phone exports to USD 11.1 billion in 2022–23 compared to the previous fiscal year.
Highlighting the dynamic expansion, India’s electronics goods exports witnessed a robust 37.6% year-on-year surge in the April-July quarter of 2023. This underscores the rapid pace of growth in India’s exports of electronics products, positioning the nation as a key player in the global electronics industry.
Outlook for the Indian Economy
Following two years of robust economic growth in 2021 and 2022, the immediate economic forecast anticipates sustained rapid expansion throughout 2023–24, driven by substantial growth in private consumption and investment.
The surge in foreign direct investment (FDI) inflows into India over the past decade reflects a positive long-term growth outlook, buoyed by a youthful demographic profile and rapidly increasing urban household incomes. Predictions for India’s nominal GDP, measured in USD terms, indicate a climb from USD 3.5 trillion in 2022 to USD 7.3 trillion by 2030. This accelerated economic expansion positions India to surpass Japanese GDP by 2030, becoming the second-largest economy in the Asia-Pacific region. By 2022, India’s GDP had already exceeded that of the UK and France, with expectations to surpass Germany by 2030.
Several key growth drivers underpin the long-term outlook for the Indian economy. The substantial and swiftly expanding middle class in India plays a crucial role in propelling consumer spending. The rapidly growing domestic consumer market, coupled with a large industrial sector, positions India as an increasingly attractive investment destination for multinationals across diverse sectors, including manufacturing, infrastructure, and services.
India’s ongoing digital transformation is poised to accelerate e-commerce growth, reshaping the retail consumer market in the coming decade. This transformation is drawing attention from leading global multinationals in the technology and e-commerce sectors.
Projections indicate that by 2030, 1.1 billion people in India will have internet access, more than doubling from an estimated 500 million internet users in 2020. The rapid expansion of e-commerce, coupled with the adoption of 4G and 5G smartphone technology, is expected to profit homegrown unicorns such as the online e-commerce platform Mensa Brands, logistics startup Delhivery, and the flourishing online grocer BigBasket, whose e-sales surged during the pandemic.
The significant increase in FDI inflows to India observed over the past five years continues, demonstrating strong momentum even during the pandemic years of 2020–2022. Robust FDI inflows into India have been driven by substantial investments from global technology MNCs like Google and Facebook, attracted by India’s vast and rapidly growing domestic consumer market. Additionally, there has been a noteworthy upturn in FDI from manufacturing firms.
In summary, India is poised to remain one of the world’s fastest-growing economies over the next decade, establishing itself as a pivotal long-term growth market for multinationals across various industries. This encompasses manufacturing sectors such as autos, electronics, and chemicals, as well as services industries like banking, insurance, asset management, healthcare, and information technology.
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Magnus, S.E.O, Ph.D, TC Economics Journal Official
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