Why in the News
India’s growth has stayed strong through a year of geopolitical fragmentation, disruptive tariff actions and a West Asia conflict that threatened oil infrastructure and intermittently closed the Strait of Hormuz. Ratings firm Crisil expects Gross Domestic Product (GDP) growth to average about 7% this fiscal. The stake is whether an export surge built on temporary global conditions can last.
What has kept India’s growth momentum going?
- What it is: Growth momentum means the economy keeps expanding steadily through shocks. Activity was robust in the first half and is expected to moderate in the second.
- Investment and credit: Continued public sector investment, strong goods exports and double digit credit growth sustained activity. Demand for consumer durables, particularly automobiles, stayed resilient.
- Household demand: Tax relief, direct benefit transfers and more borrowing supported spending. Households’ debts grew faster than their financial assets, but they remain net financial savers.
- The takeaway: Growth rests on several supports at once, but household debt finances part of the consumption.
Why did the global economy not slow down as feared?
- Artificial Intelligence (AI) investment: Spending on data centres, semiconductors and digital infrastructure became a growth engine. S&P Global finds it a significant share of United States private capital spending, so economies supplying its inputs gained.
- Muted crude prices: Many countries drew down strategic reserves (emergency oil stocks) and inventories. Softer global demand also limited the rise in crude prices.
- Tighter monetary policy: Costlier energy, freight and insurance added to inflation. Major central banks, including the Reserve Bank of India (RBI), kept interest rates high for longer than anticipated.
Why have exports and companies done well?
- Goods exports: Merchandise exports grew 19% in the first half, led by electronic goods, engineering goods and chemicals. Trade diversification and links with emerging supply chains helped.
- Export mix: Goods exports could outperform services exports this year, a rare event, and raise their share in total exports.
- Refining windfall: Damage to refineries elsewhere pushed fuel prices up more sharply than crude. India’s petroleum exports rose 37% in dollar terms in April to September, which limited the merchandise trade deficit.
- Corporate credit quality: Crisil Ratings’ credit ratio, the number of rating upgrades for every downgrade, improved to 2.18 times in the first half, so companies can absorb geopolitical shocks.
- Uneven profit margins: Commodity producers gained from higher prices. Manufacturers that buy those commodities, and consumer facing industries, absorbed the rising costs to protect demand.
Why can the export surge not be taken for granted?
- Growth and inflation mix: Companies increasingly pass input costs on to consumers, and farm output slows after a weak monsoon, so growth moderates as inflation rises.
- Inflation and rates: Crisil expects consumer inflation to average around 5.3% and a further quarter percentage point (25 basis point) rate increase by the RBI in December.
- Temporary alignment: Goods exports prospered on an unusual mix of geopolitical shifts, supply chain realignments and favourable prices. Such alignments are rarely permanent.
- Free trade agreements (FTAs): The recent FTAs create possibilities, not outcomes. Countries that endure as export powerhouses continually lower costs, raise productivity and innovate faster than their peers.
Challenges
- Foreign capital outflows: Net outflows in eight months of this fiscal exceeded those of the whole previous fiscal. The November return of portfolio flows (foreign money in shares and bonds) could be temporary.
- Rabi crop risk: Deficient kharif (monsoon season) rainfall, lower reservoir levels and persistent El Nino conditions threaten the coming rabi (winter sown) crop.
- Global food prices: Rising energy and fertiliser costs, biofuel demand and weather disruptions are raising food prices worldwide, which complicates domestic food inflation management.
Way Forward
- Budget priority: The Finance Ministry should make manufacturing competitiveness the first objective of the coming Union Budget.
- Capital gains tax review: A favourable review of long term capital gains tax (on profit from shares held long) would support equity inflows.
- Use of trade agreements: Exporters should use the new FTAs to compete on cost and quality.
Conclusion
India’s growth has held, but the export gains behind it rest on global conditions that will not last. Whether the coming Budget turns this surge into lasting manufacturing competitiveness is the thing to watch.
Key numbers
- Petroleum exports in rupee terms: Up nearly 50% on year in April to September, because of currency depreciation.
- Corporate revenue: Estimated growth of 16 to 16.5% on year in July to September (Crisil Intelligence).
- Median debt to equity ratio: Around 0.5 times for companies.
Matching Previous Year Question
“[2022, GS3, 15 marks] “Economic growth in the recent past has been led by increase in labour productivity.”Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity.”
