The global economic recovery post-pandemic was well on track before the Russian-Ukraine conflict broke out. However, the conflict disrupted the supply chain of critical commodities such as crude oil, natural gas, fertilisers, and wheat to soar, which made the inflation situation worse. Already, inflation was at record levels in advanced economies due to the fiscal stimulus and ultra-accommodative monetary policies meant to revive economies in 2020. The central banks had to step in when they realised that the inflation level was not transient but persistent and stubbornly high. A synchronous hike in policy rates by the banks followed, and the tightening cycle has been distinctly rapid, significantly impacting the global output.
The Indian economy has made several strides in the last few decades. This chapter covers India's economic growth story in the last few years and compares it with several key indicators of the last few decades. Liberalisation: It ended the public sector monopoly and encouraged private sector firms by initiating the automatic approval policy for FDI up to 51% in many sectors. Impact: The real growth went up from 5.5% on average during the 1980s to 6.3% till 2000. Exchange rate: The rupee became fully current account convertible and partially capital account convertible. Impact: External trade rose from 17.2% of GDP in 1990 to 30.6% in 2000. FDIs became the main source of non-debt-creating capital inflows. New Telecom Policy 1999 separated the licensing functions of the government from that of an operator (BSNL), which allowed private sector participation with a strengthened regulatory regime (TRAI). Impact: An IT sector boom in India had widespread spillover benefits on all sectors of the economy.
Fiscal space with governments has become essential due to global risks and economic uncertainties. The Government’s fiscal policy was instrumental in economic growth and providing a safety net to the vulnerable sections in the past years. Several factors, such as the conflict in Europe, overstimulation of demand, and supply chain disruptions, have led to inflationary pressure. In this light, the Government of India adopted calibrated fiscal response and planned to withdraw fiscal stimulus gradually to cope with the inflationary situation. Due to uncertain global markets and supply chain disruptions due to COVID-19 and high food and fuel prices, the Government had to spend more than planned. Despite this, the Union Government is well on track to achieve the budget estimate for the fiscal Deficit in FY23. The central Government’s fiscal Deficit was at 6% of the budgetary estimates last year.
In the wake of the global scenario of growing economic uncertainties in the past couple of years – RBI and the government has taken necessary steps to deal with the situation of growing inflation. On the lines of other central banks across the globe, RBI has adopted a dear money policy along with some other systemic reforms, resulting in lower NPAs and bettering other operational indicators for financial institutions. RBI has slowly increased its policy rates to deal with the surplus liquidity condition of post-Covid times. With the change in the MSF rate, the liquidity adjustment facility (LAF) corridor has become symmetric with the repo rate. The subsequent hike in CRR has absorbed approximately 87,000 crores from the banking system.
In India, Consumer price inflation went through three phases in 2022. • A growing phase up to April 2022, when it crested at 7.8 %. • A holding pattern at around 7.0 % up to August 2022. • A decline to around 5.7 % by December 2022. FY22 witnessed lower CPI-Combined (CPI-C) based retail inflation compared to FY21. During FY22, ‘oils & fats’, ‘fuel & light’ and ‘transport & communication’ reported high inflation. Retail inflation was predominantly driven by higher food inflation, while core inflation remained moderate in FY23. Food inflation was between 4.2%to 8.6% between April and December 2022, while the core inflation rate lay at around 6%except in April 2022. Retail price inflation mainly stems from housing, pharmaceuticals, textiles, agriculture and allied sectors. During FY23, ‘food & beverages, ‘fuel & light’, and ‘clothing & footwear’ were the key contributors to headline inflation.
Social infrastructure forms the foundational services and structures that add to the citizens’ quality of life and indirectly contribute to economic development through increased income, better productivity and technological advancement. Quality of life encompasses various factors: Basic income and employment opportunities Education levels; Healthcare, Social security, Connectivity etc. Therefore, a robust social infrastructure customized to the country’s diversity and citizens’ unique needs can ensure the quality of life. The government has integrated the broader perspective of the concept of quality of life into its agenda for social infrastructure development. This recognition is echoed in India’s adoption of the UN SDGs 2030.
Climate change is a prolonged change in weather and temperature patterns that can occur due to natural reasons. The global nature of the matter makes India one of the most critical countries though it contributed only about 4 % of the cumulative global emersion for 1850-2019. However, it has consistently demonstrated global leadership by taking various measures and ensuring a low-emission growth pathway with a pledge to the net-zero emissions goal by 2070. As per UN SDG Portal, by 2030, more than 700 million people worldwide will be at risk of displacement by drought alone. As per the IPCC’s Sixth Assessment Report, global hotspots are found particularly in South Asia, West, Central & East Africa, Central, and South America, Small Island Developing States, and the Arctic.
With its firm forward linkages, agriculture and allied activities significantly contributed to the country’s overall growth and development by ensuring food security. But the performance has been buoyant over the past several years. To tackle the issue, the government intervened: to enhance credit availability, aggravate livestock and crop productivity, promote crop diversification, ensure certainty of returns to the farmers through price support, facilitate mechanisation and boost horticulture and organic farming through the Agriculture Infrastructure Fund.The agriculture sector has thrived at an average annual growth rate of 6 %during the last six years. It grew by 0 %in 2021-22 compared to 3.3 %in 2020-21. The exports of agriculture and allied products grew by 18 % in 2022-21.
The Indian industry is central to the Indian economy, contributing to about 30% of the total GVA. However, in the last three years, the Indian industries have faced a set of challenges, including the Covid-19 pandemic and the Russia-Ukraine war, due to which the input prices mounted, disrupting the supply chain. However, the Indian industry stayed afoot due to a domestic demand stimulus, a strong export performance, healthier corporate balance sheets and an increase in the private investments triggered by the augmented Capex of the central government. But in the early FY23, some factors like persistent inflation and rising interest rates in the advanced economies dragged down export demand leading to a decline in the export performance of the Indian industries.
India has been a major player in services trade, being among the top ten services exporting countries in 2021, having increased its share in world commercial services exports from 3% in 2015 to 4% in 2021. The Covid-19 pandemic hurt most sectors of the economy, with the effect particularly profound for contact-intensive services sectors like tourism, retail trade, hotel, entertainment, and recreation. On the other hand, non-contact services such as information, communication, financial, professional, and business services remained resilient. However, the services sector witnessed a swift rebound in FY22, growing Year-on-Year (YoY) at 8.4% compared to a contraction of 7.8% in the previous financial year. The improvement was driven by growth in the ‘Trade, Hotel, Transport, Storage, Communication and Services related to the broadcasting sub-sector, which bore the maximum burden of the pandemic. This subsector completely recovered from the pre-pandemic level in Q2 of FY23, driven by the release of pent-up demand, ease of mobility restriction, and near-universal vaccination coverage.
India's external sector has been stroked by shocks and uncertainty manifested in terms of elevated global commodity prices; tightening international financial conditions; reversal of capital flows; heightening financial market volatility; currency depreciation, and looming worldwide growth and trade slowdown. In the current scenario, trade is indispensable for economic growth. With time, the trade openness of countries across the globe has been rising as measured by trade as a proportion of GDP. As per the World Bank, the share of trade as a percentage of total world GDP has been 50-60 %since 2003 and stood at 52 %in 2020.
To broaden the country’s socio-economic development, the Government has used social overhead capital to enhance development in the country’s remote areas via budgetary allocations, subsidies and effective programme delivery. In an integrated approach to developing infrastructure, the Government put forth the National Infrastructure Pipeline with a projected investment of 111 Lakh Crore FY20-25. Infrastructure development funding comes from various sources such as Government, private, and multilateral. Other structural and financial reforms by the Government, such as InvITs, REITs, creation of dedicated financial institutions (NaBFID), and viability gap funding, are crucial for the extension of infrastructure facilities.
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