Indian economy to outpace world average growth in 2023 – Can it duck global headwinds?

• Capex revival and increased infrastructure spending by the government are likely to be among the key drivers of the Indian economy in 2023, according to analysts.
  
• Analysts say they are already seeing multiple green signals of higher capacity utilisation levels, higher capital spending and de-leveraged balance sheets which point to a capex cycle revival.
  
• While India’s economy will be punctuated by global headwinds, it is still estimated to grow in the 4.8-5.9% range in 2023, outpacing the 1.8% projected global growth.
  

The Indian economy’s growth expectations in 2023 will be punctuated by global headwinds – mainly a demand slowdown and geopolitical overhangs, according to analysts at Kotak Economic Research. While India’s GDP growth is projected to be between 4.8-5.9% next year by global agencies, these “negative surprises” remain a risk factor.

According to analysts, multiple green signals like capacity utilisation levels, higher capital spending and de-leveraged balance sheets give strong indications of a revival in the capex cycle that will be a big spur to the economy.

The Indian government has also accelerated capex spends – in the first half of FY23, the government’s capex spends stood at ₹3.2 lakh crore. This is equal to 60% of the capex spend for the whole of FY22, which was ₹5.5 lakh crore.

Together, these factors paint a relatively optimistic picture for the Indian economy heading into 2023 – it is set to outpace the global economic growth average of 1.8%.

Despite a slowdown in the Indian economy due to elevated inflation and the post-Covid boost wearing off, the World Bank also recently upgraded its FY23 projections for India’s GDP growth to 6.9% from 6.5% , saying the economy was showing higher resilience to global shocks.

Analysts highlight a few key factors that underscore the resilience of the Indian economy – robust tax collections, capacity utilisation reaching a 17-quarter high and forex reserves crossing the $550 billion mark once again.

Here are some factors that will shape India’s growth trajectory in 2023

Revival of the capex cycle

Of the key indicators mentioned by analysts, capacity utilisation level has already shown an improvement – at 75%, it has hit a 17-quarter high. Capex spending by the government and listed companies has now hit an all-time high on a trailing 12-month (TTM) basis, and according to analysts at ICICI Securities, it will touch ₹21 lakh crore in FY23.

“The analysis clearly highlights multiple engines of growth starting to fire together, which would lend stability and visibility to capital outlay in the economy over FY22-26,” said a report by HDFC Institutional Research.

Rise in government’s infrastructure spends

In FY23 alone, the budget for infrastructure spending rose 35.4% when compared to FY22. The share of capex spending as a percentage of India’s GDP is projected to increase to 2.9% in FY23 from 2.5% in FY22.

Two schemes – the National Infrastructure Pipeline (NIP) worth ₹111 lakh crore, and the PLI (production-linked incentive) scheme worth ₹2 lakh crore – will be the key drivers of the government’s capex growth, according to a report by Prabhudas Lilladher. The NIP was announced for the 2020-25 period.

Now, a report by the Economic Times says that the critical sectors of railways, roadways and ports are expected to see a “significant” increase in Budget 2023

Return of the foreign investors

While the first half of 2022 saw foreign investors fleeing the Indian market, the trend reversed in the second half.

Foreign portfolio investors (FPIs) had withdrawn ₹2.32 lakh crore from India’s equity and bond markets until June 2022. Since then (July-November), they have pumped in ₹92,763 crore, according to data from NSDL.

“FIIs are now pouring money in domestic-facing sectors like banks and consumption stocks which are immune to global shocks and traction is apparent in terms of India’s credit growth and consumer spending,” said Hitesh Jain, lead analyst – institutional equities at Yes Securities.

Rural revival and broad-based recovery in demand indicators

India’s rural economy is now showing signs of a revival, according to the readings of four key indicators – employment, credit offtake, auto sales, and trade, according to a report by Morgan Stanley.

“High-frequency data suggest that overall economic activity has been normalising over the past three months after remaining sluggish in the trailing 12 months. Our consolidated rural activity tracker shows a pickup in YoY terms over the last 3-4 months,” the report said.

Another key driver of India’s economic growth next year will be a demand uptick.

“We expect domestic demand indicators to exhibit broad-based recovery and to be the key driver of India’s growth trajectory amid global headwinds,” said Upasana Chachra, chief India economist, Morgan Stanley.

(With inputs from PTI)

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