- Date : 01/02/2023
- Read: 6 mins
India has emerged as a bright spot, especially at a time when the world is going through recession. Everyone is expecting a robust 2023. With a looming US recession, employee layoffs by major tech companies, and spiraling inflation in Europe and USA, there are many roadblocks to a robust Indian economy in 2023. However, 2023 is going to be a watershed year in many ways. Learn about the various factors that will affect Indian economy this year.
Top 7 Factors likely to Affect the Indian economy in 2023
The Indian economy has faced lots of challenges since the beginning of last year. Everyone thought 2022 would be a prospective year, especially after the two-year mayhem caused by Covid-19. However, the Ukraine-Russia conflict disrupted the world economy again.
The trajectory of India's prospect depends heavily on the actions taken now. The Union Budget for the 2023-24 financial year will have a significant effect in the years to come.
So, without any further ado, let's explore 7 economic trends most likely to influence the Indian economy in 2023 significantly.
Top 7 Factors to Affect the Indian Economy in 2023
1. India’s Growth Story
Indians are expecting a prospective year ahead. Even when the world suffers from recession, India is emerging as a bright spot.
During April-June '22 and July-September '22, the Indian economy grew at 13.5% and 6.3%, respectively. In their latest reports, the World Bank and IMF have said that the Indian economy will become one of the fastest-growing economies in 2022-23.
Morgan Stanley expects India to grow 7% in FY23, the strongest among the major economies globally. According to the estimates of SBI economists, by 2029, the Indian economy will be the 3rd largest economy in the world.
Ernst & Young, a leading global consulting firm, has said that the Indian economy will become an economic giant by 2047 with a US$ 26 trillion GDP and US$ 15,000 per capita income. According to IHS Markit, India's GDP will hit the US$8.4 trillion milestone by 2030.
2. Concerns about Inflation
The war in Ukraine is affecting the Indian economy. The start of this conflict impacted two major trade routes, shot up oil prices in the international market, and impacted the global supply chain.
These factors made:
- Inflation to shoot up
- Stock market to tumble
- Indian Rupee (INR or ₹) to fall against US Dollar
- Forex reserve to fall significantly
For ten months in 2022, the inflation rate remained above 6%, the upper tolerance band in India. Both the Reserve Bank of India (RBI) and the government did a good job of controlling inflation by:
- Changing key rates
- Import of cheap crude oil from Russia and others
Though the inflation is below 6%, the ordeal is not over. The imbalances in demand and supply of various commodities remain. The IMF has praised policy tightening by India at the right time. However, it has asked India to remain careful about future interest rate hikes.
3. Possible Rate Hikes in the Coming Days
Since May 2022, RBI has increased its key policy rate by 225 basis points. The repo rate has reached its highest level in the last three years. Though rate hikes have helped cool down inflation, it has made loans dearer. People are now paying more for their EMIs.
As the general voices rise against further rate hikes, RBI governor Shaktikanta Das has made it clear that an abrupt pause in rate hikes will make the battle against inflation problematic. With the Ukraine-Russia conflict unlikely to end soon, the supply bottleneck will increase commodity prices. Therefore, the apex banks worldwide (including RBI) are likely to continue key policy rate hikes sometime soon.
4. US Recession
The US is still the biggest economy in the world. Its GDP contributes over 24% to the world's GDP. However, reports suggest that the US economy is moving towards a recession.
Major tech companies, including Google, have laid off many techies in the US. A Reuter report claims that the investors are preparing themselves for a recession in 2023. Inflation in the United States has reached a forty year high level. This is high time that India should prepare itself to embrace the likely wave of recession in the US.
However, many experts believe that the recession will likely create more jobs in India as the companies in the US will look for more affordable options, especially outside the US. As India has an educated and English-speaking workforce, India could, in fact, benefit from the US recession.
5. Slowdown of Chinese Economy
China is the second-largest economy in the world. However, the Chinese economy is witnessing a slowdown due to their zero covid policy, property fiasco, and global economic slowdown.
In Jan-Nov 2022, the profits of China's industrial companies dropped significantly. With the shift away from the zero covid policy and reopening their domestic economy, China expects a significant recovery in 2023.
According to the analysts of JP Morgan, the Chinese economy is likely to witness the following:
- Quicker recovery in 2023’s first quarter
- Expected sustained recovery from Q2 2023
Despite this recovery, analysts believe China will likely miss its yearly target by 5.5%. With a possible slowdown of China, the spillover effect may be felt by other economies, including India.
6. Indian Stock Markets
The Indian equity market has emerged as the best performer in Asia. While most of the major global indices are in the red, India's Sensex and Nifty are up by +4.4% and +4.3%, respectively. In MSCI's emerging markets index, the equity market of India doubled to 16% since 2019.
The three major reasons that helped the Indian stock market to perform better are:
- China+1 strategy of the world economies and the emerging India story
- A boom in the Indian retail sector after the pandemic
- Forecast of Indian economy’s fastest economic growth
This has strengthened hopes for a better stock market performance in 2023. Experts believe that three factors will largely drive the stock market in 2023:
- A strong expectation of robust corporate earnings in the next fiscal
- Continued retail boom after covid-19
- The expectation of the Indian economy to grow by over 6% in 2023
Experts believe larger FPI inflows in India will boost the stock market in 2023.
7. Debate on Fiscal Prudence
Another factor that will likely impact the Indian economy is the India story in 2023 is the debate surrounding the fiscal prudence of the Indian states. There are two major aspects of this debate:
- Old Pension Scheme (OPS) vs New Pension Scheme (NPS)
- Freebies
While some stress the welfare state's role, others point out the necessity to lessen India's overall debt and borrowings.
Two major states in India, Chhattisgarh and Rajasthan, have reverted to the old pension scheme to give government employees a better retirement benefit. However, reports claim that this move has significantly affected the states' finances and increased their financial burden.
In 2023, elections will be held in nine states. Many states have announced many kinds of freebies. The RBI has asked the states to control freebies as they are increasing the extent of borrowings of these states significantly. It needs to be seen how productive the freebies are in uplifting people's lives. These factors will affect the Indian economy in 2023.
References:
- Times Of India
- YCharts.com
Top 7 Factors likely to Affect the Indian economy in 2023
The Indian economy has faced lots of challenges since the beginning of last year. Everyone thought 2022 would be a prospective year, especially after the two-year mayhem caused by Covid-19. However, the Ukraine-Russia conflict disrupted the world economy again.
The trajectory of India's prospect depends heavily on the actions taken now. The Union Budget for the 2023-24 financial year will have a significant effect in the years to come.
So, without any further ado, let's explore 7 economic trends most likely to influence the Indian economy in 2023 significantly.
Top 7 Factors to Affect the Indian Economy in 2023
1. India’s Growth Story
Indians are expecting a prospective year ahead. Even when the world suffers from recession, India is emerging as a bright spot.
During April-June '22 and July-September '22, the Indian economy grew at 13.5% and 6.3%, respectively. In their latest reports, the World Bank and IMF have said that the Indian economy will become one of the fastest-growing economies in 2022-23.
Morgan Stanley expects India to grow 7% in FY23, the strongest among the major economies globally. According to the estimates of SBI economists, by 2029, the Indian economy will be the 3rd largest economy in the world.
Ernst & Young, a leading global consulting firm, has said that the Indian economy will become an economic giant by 2047 with a US$ 26 trillion GDP and US$ 15,000 per capita income. According to IHS Markit, India's GDP will hit the US$8.4 trillion milestone by 2030.
2. Concerns about Inflation
The war in Ukraine is affecting the Indian economy. The start of this conflict impacted two major trade routes, shot up oil prices in the international market, and impacted the global supply chain.
These factors made:
- Inflation to shoot up
- Stock market to tumble
- Indian Rupee (INR or ₹) to fall against US Dollar
- Forex reserve to fall significantly
For ten months in 2022, the inflation rate remained above 6%, the upper tolerance band in India. Both the Reserve Bank of India (RBI) and the government did a good job of controlling inflation by:
- Changing key rates
- Import of cheap crude oil from Russia and others
Though the inflation is below 6%, the ordeal is not over. The imbalances in demand and supply of various commodities remain. The IMF has praised policy tightening by India at the right time. However, it has asked India to remain careful about future interest rate hikes.
3. Possible Rate Hikes in the Coming Days
Since May 2022, RBI has increased its key policy rate by 225 basis points. The repo rate has reached its highest level in the last three years. Though rate hikes have helped cool down inflation, it has made loans dearer. People are now paying more for their EMIs.
As the general voices rise against further rate hikes, RBI governor Shaktikanta Das has made it clear that an abrupt pause in rate hikes will make the battle against inflation problematic. With the Ukraine-Russia conflict unlikely to end soon, the supply bottleneck will increase commodity prices. Therefore, the apex banks worldwide (including RBI) are likely to continue key policy rate hikes sometime soon.
4. US Recession
The US is still the biggest economy in the world. Its GDP contributes over 24% to the world's GDP. However, reports suggest that the US economy is moving towards a recession.
Major tech companies, including Google, have laid off many techies in the US. A Reuter report claims that the investors are preparing themselves for a recession in 2023. Inflation in the United States has reached a forty year high level. This is high time that India should prepare itself to embrace the likely wave of recession in the US.
However, many experts believe that the recession will likely create more jobs in India as the companies in the US will look for more affordable options, especially outside the US. As India has an educated and English-speaking workforce, India could, in fact, benefit from the US recession.
5. Slowdown of Chinese Economy
China is the second-largest economy in the world. However, the Chinese economy is witnessing a slowdown due to their zero covid policy, property fiasco, and global economic slowdown.
In Jan-Nov 2022, the profits of China's industrial companies dropped significantly. With the shift away from the zero covid policy and reopening their domestic economy, China expects a significant recovery in 2023.
According to the analysts of JP Morgan, the Chinese economy is likely to witness the following:
- Quicker recovery in 2023’s first quarter
- Expected sustained recovery from Q2 2023
Despite this recovery, analysts believe China will likely miss its yearly target by 5.5%. With a possible slowdown of China, the spillover effect may be felt by other economies, including India.
6. Indian Stock Markets
The Indian equity market has emerged as the best performer in Asia. While most of the major global indices are in the red, India's Sensex and Nifty are up by +4.4% and +4.3%, respectively. In MSCI's emerging markets index, the equity market of India doubled to 16% since 2019.
The three major reasons that helped the Indian stock market to perform better are:
- China+1 strategy of the world economies and the emerging India story
- A boom in the Indian retail sector after the pandemic
- Forecast of Indian economy’s fastest economic growth
This has strengthened hopes for a better stock market performance in 2023. Experts believe that three factors will largely drive the stock market in 2023:
- A strong expectation of robust corporate earnings in the next fiscal
- Continued retail boom after covid-19
- The expectation of the Indian economy to grow by over 6% in 2023
Experts believe larger FPI inflows in India will boost the stock market in 2023.
7. Debate on Fiscal Prudence
Another factor that will likely impact the Indian economy is the India story in 2023 is the debate surrounding the fiscal prudence of the Indian states. There are two major aspects of this debate:
- Old Pension Scheme (OPS) vs New Pension Scheme (NPS)
- Freebies
While some stress the welfare state's role, others point out the necessity to lessen India's overall debt and borrowings.
Two major states in India, Chhattisgarh and Rajasthan, have reverted to the old pension scheme to give government employees a better retirement benefit. However, reports claim that this move has significantly affected the states' finances and increased their financial burden.
In 2023, elections will be held in nine states. Many states have announced many kinds of freebies. The RBI has asked the states to control freebies as they are increasing the extent of borrowings of these states significantly. It needs to be seen how productive the freebies are in uplifting people's lives. These factors will affect the Indian economy in 2023.
References:
- Times Of India
- YCharts.com
