Indian economy remains on a balanced growth path

Preliminary estimates from May suggest that economic growth in India in the most recent fiscal year (April 2022–March 2023) was 7.2 %, or two-tenths of a percent higher than earlier estimates. The country’s robust economic performance was largely due to the rise in gross fixed capital formation, which was up by 11 % y-o-y. Aggressive government investment policies have driven up gross fixed capital formation to 34 % of GDP. Private consumption also experienced strong growth (8 %) in the last fiscal year, while public consumption remained flat. Imports grew by 17 % and exports by 14 %. India’s foreign trade deficit corresponded to about 2 % of GDP.

Monthly indicators such as purchasing manager indices suggest that growth has remained strong throughout 2023. In its latest World Economic Outlook, the IMF estimates that India’s economic growth should remain around 6 % in coming years. The Reserve Bank of India expects 6.5 % GDP growth this year.

Rapid investment driven growth reflects India’s fiscal policies stressing support for infrastructure investment in public funds. The central government budget for this fiscal year released in February shows that public or government subsidised spending will increase by about a third. Finance minister Nirmala Sitharaman claims that the current investment in public infrastructure will bolster private commerce in India. The central government budget for the current year is expected to be 6.4 % in the red, which is still sufficient to keep India’s debt ratio (public sector debt to GDP) roughly unchanged at around 83 %.

India’s monetary conditions are fairly stable at the moment. The latest available figures from May show consumer prices rising at just 4.3 % p.a., which is close to the central bank’s 4 % inflation target. The latest trends suggest that the spike in India’s annual inflation to around 7 % last summer and autumn on higher global commodity prices has largely subsided. The central bank expects inflation to remain within its 2–6 % target band for the current year. The monetary policy committee decided at its June meeting to keep the key steering rate (repo rate) unchanged at 6.5 %.

The purchasing manager indices for India have remained well above the neutral reading of 50 for the past 18 months

 Sources: IHS Markit, Macrobond and BOFIT.