Prospect of Indian Economy in 2023

Context - 

The Indian economy is expected to develop at a relatively robust 6.9% annual rate in 2022-23, while inflation has begun to moderate.

  • The primary event in 2020 was the statewide lockdown following the first wave of the Covid-19 epidemic, which affected the nature of India's economy.
  • The brutal second wave of Covid affected our economy and recovery in 2021.
  • Russia's invasion of Ukraine in 2022 mainly affected the fate of India's economy.
  • As a result, concerns over inflation, the rupee's exchange rate, and India's forex reserves took precedence over usual concerns about GDP growth.

What are the highlights of the recap?


  • Headline When 2022 began, retail inflation was already above 6%.
  • The inflationary scenario worsened following Russia's invasion of Ukraine.
  • Retail inflation will reach an eight-year high in April 2022. By the time the RBI decided to raise interest rates at a hastily called MPC (Monetary Policy Committee) meeting in May 2022.
  • The United States and the acts of the United States Federal Reserve were identified as major contributors to worldwide inflation.

Exchange Rate of the Rupee and Forex Reserves:

  • Higher crude oil prices began to have a negative impact on several of India's macroeconomic indices.
  • As the fiscal year began, trade deficits began to rise, raising concerns about India's current account deficit (CAD), forex reserves, and balance of payments.
  • The rupee eventually reached the politically sensitive 80-to-a-dollar level. However, the rupee was one of many currencies losing strength over the US dollar. The dollar had moved to parity with the euro.

Monetary Tightening Across the Board:

  • By the middle of the year, central banks worldwide had begun to raise interest rates to decrease liquidity and keep inflation under control.
  • India grew by about 9% in the preceding fiscal year (2021-22), which concluded in March 2022.
  • In September 2022, India surpassed the United Kingdom to become the world's fifth-largest economy.
  • India's growth rate is predicted to decline from almost 9% in the previous fiscal year (2021-22) to around 7% in the current fiscal year (2022-23) and then to about 6% (or potentially lower) in the next fiscal year (2023-24).

Budgetary Issues, Unemployment, and Poverty:

  • The main issue in the run-up to the Union Budget was determining if the administration could develop a strategy to expand employment in the country. This is because India had historically high levels of labour market stress before Covid, and the epidemic had further exacerbated issues.
  • The Indian Budget 2022-23 bets on dramatically increasing capital investment to kickstart a virtuous cycle of prosperity.
  • However, while this policy had apparent benefits in normal times, analysts claimed that Covid still damaged India's economy. It was questionable whether the Budget would do enough to promote employment.

How does the Global Economic Forecast for 2023 look?

Forecasted growth:

  • In its 'State of the Economy' update, the Reserve Bank of India warned of "a gloomy global outlook", and emerging market economies (EMEs) looked to be "more susceptible".
  • The forecast that global growth would average approximately 3% in 2022 is admirable.


  • Although global food, energy, and other commodity prices have moderated recently, inflation remains strong.
  • According to the IMF (International Monetary Fund), global inflation will fall from 8.8% in 2022 to 6.5% in 2023 and 4.1% in 2024 – still high by most yardsticks.
  • The challenge for the US Federal Reserve in 2023 is the ramifications of persistently rising inflation, particularly the fact that the American labour market stays hot, resisting the influence of the Fed's monetary tightening.

The Effect of US Fed Rate Hikes:

  • Every time the Fed raises policy rates, the spread between US and Indian interest rates grows, making the latter less appealing for currency carry trades.
  • Increased returns in US debt markets may cause a churn in developing market stocks, dampening foreign investor excitement.
  • Currency markets might be influenced by the flight of capital to the US; persistent Fed rate rises would also mean less stimulus to growth in the US, which could be bad news for global GDP, especially as China faces a fresh Covid epidemic.

What are the Indian Economy's Prospects for 2023?


  • The Indian economy's near-term growth prognosis is underpinned by internal forces, some of which are reflected in the positive trends in high-frequency indicators.
  • Over the previous five years, there has been tremendous deleveraging, with corporate debt-to-GDP at its lowest in over a decade and a half and bank books having shed much of the residual bad loans.
  • The lower the debt-to-GDP ratio, the more likely the country will repay its debt and the lower the chance of default, thereby causing financial stability in local and international markets.
  • Waning input cost constraints, rising corporate sales, and an increase in fixed asset expenditures are signalling the start of an upturn in the Capex Cycle, which may contribute to a restart of India's development momentum.
  • Bank credit has been expanding in the double digits for the past eight months, increasing investment demand.
  • Most multinational businesses' China-plus-one strategy might be an opportunity, given that China is vacating vast amounts of space in low-skilled, unskilled labour-heavy industries such as textiles, shoes, leather, and ceramics. India has the potential to occupy a portion of this vacuum.
  • Agriculture has been a consistent engine of total GDP development. The rabi prognosis indicates favourable wheat production prospects with higher support prices, appropriate reservoir levels, and meteorological variables supporting increased acreage.


  • The Ukraine conflict rages on, threatening an energy-related slump in the European Union, India's largest export market.
  • The United States is still dealing with low inflation, and a pause in the Fed's rate rises seems unlikely until the year's second half.
  • Higher protectionism, increased zeal for de-globalization, and more economic balkanization are all expected by 2023, posing a concern for nations like India that rely on exports to generate growth.
  • The global protectionist climate is a huge deterrent for emerging economies since no nation in the world has expanded at a rate above 7% for a decade without seeing robust export growth.
  • Manufacturing in India still needs to be improved. In the joyous month of October 2022, factory production, as measured by the Index of Industrial Production (IIP), fell to a 26-month low. October had the lowest increase in the core sector in 20 months, at just 0.1%. As a result, economists have quickly revised their estimates of India's growth for the upcoming fiscal year lower.
  • Although it has somewhat increased, capacity utilization—the percentage of actual output to the output that might be generated under normal circumstances—remains at or around 75%.
  • Private investments are likely to increase if this rises steadily and noticeably.
  • The Micro, Small, and Medium Enterprises (MSME) businesses are still in crisis, reflecting the stark differences in industrial recovery between larger and smaller businesses.
  • The states' capital spending has remained low. State investments often have a greater multiplier effect.
  • At 4% of its GDP, India is heavily dependent on imported energy, which presents problems for its balance of payments. For FY23, a current account deficit of over 3% is anticipated.
  • Despite the robust farm output, rural salaries decreased for the ninth consecutive month in September, indicating ongoing hardship in the hinterland.

Source: IE 


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