Surfing on rapid growth
India currently holds twin accolades in the world: it is on track to surpass China as the most populous nation and is one of the fastest growing economies in the world.
Estimates from the United Nations World Population Prospects data place India as home to 1.429 billion in 2023, higher than the 1.426 billion projection for China for the year. In particular, the crossover point already occurred in April 2023 as India matched China’s population and from there, took the top spot. Based on UN estimates, the South Asian country is expected to remain the most populous country until at least 2050.
The concept of the “Golden Rule” among economists means that India’s economy should at least match population growth as it now has more mouths to feed. As a developing country, the quality of food and basic needs provided to dependent members of the population is an attendant concern.
Aside from its population growth, India is on the right track in terms of rapid economic expansion. It has maintained its foothold as the fifth largest economy in the world, and the World Bank sees India to remain one of the fastest-growing emerging market economies until at least 2025. The country’s economy grew by 7.6 per cent in July-September, sustaining its rapid expansion so far in 2023 albeit softer than the 7.8 per cent pace the previous quarter. Full-year growth averaged 7.2 per cent in its fiscal year ending March 2023.
India is also the growth leader among the G20 member-economies. What will it take to sustain this momentum?
Manufacturing leads
The manufacturing sector fueled the quarterly expansion, growing by 13.9 per cent from a year ago. This offset a slowdown in the output of Indian service workers which managed a 5.8 percent expansion. With a median age of 28.2 years, India’s relatively young population will support the economy further with more working-age than dependent individuals in the market.
Manufacturing appears on track to sustain its momentum. Companies expressed stronger optimism for the October-December period due to expectations of higher demand for products and capacity utilization, and overall business situation, according to the Industrial Outlook Survey of the Reserve Bank of India (RBI). Manufacturing performance typically mirrors business optimism as seen in Graph 2.
Meanwhile, progress in the agriculture sector is threatened by a looming El Niño phenomenon that could disrupt improving yields. Farm output saw a faster growth of 4 per cent in India’s fiscal year 2022-2023 at a pace that still outstrips overall population growth, but that has slowed to 1.2 per cent in the third quarter. Countries should typically match farm output growth with the pace of population increase so it can feed its people.
Focus on interest rates
Since 2022, the RBI moved in sync with the US Federal Reserve’s tightening moves in the face of rising inflation. Six consecutive rate hikes have been introduced by the central bank to reel inflation in.
The central bank has kept the benchmark repo rate at 6.50 per cent since February as it continues to be cautious of unwinding high rates too early, matching moves of other developing economies.
Market analysts have speculated that monetary policymakers will stay on hold well into mid-2024 and would rather use other calibration tools to inject additional liquidity in the financial system as a first step towards monetary easing. This would typically provide some counterbalance to borrowing costs, which are at a five-year high. The cash reserve ratio (CRR) has stood at 4.5 per cent since May 2022, which is a more flexible tool for contractionary policy in periods of high inflation. The reserve requirement relative to banks’ total deposits captures excess liquidity in the financial system whenever the RBI is raised, while more cash is pumped into the economy once the CRR is reduced.
Unlike other central banks, there is little pressure facing India’s monetary officials to unravel post-pandemic rate hikes right away considering how well the economy performed even in an era of high-borrowing costs elevated inflation. Steeper interest rates have dampened household consumption, but it has also supported the easing of headline inflation from 7.41 per cent in September 2022. Inflation shot up to 7.44 per cent in July, but has since cooled to 4.87 in October.
Last year’s series of RBI rate hikes, however, have not been enough to support the rupee to trade competitively against the US dollar as it weakened to 83:1 as of end-November. This will exert some strain on India’s import bill, which accounted for 26.4 per cent of its GDP as of end-March.
The World Bank expects India to remain a global growth leader, with a 6.3 per cent GDP expansion in 2024 despite some slowdown in private spending. There are enough reasons for investors to take or maintain their positions in India as strong economic growth is likely to persist for years to come and population growth remaining under control. As both inflation and interest rates normalize, private consumption will most likely accelerate and fuel faster economic growth.
