This India’s economic growth analysis article was written by Zheman Zhong – Financial Analyst at I Know First.

Highlights

• India’s GDP experienced significant growth in the fiscal year 2022-23, with a 6.1% expansion in Q4, leading to an annual growth rate of 7.2%. The GDP reached the $3.75 trillion mark, making India the fifth-largest economy in the world.
• India’s economic growth entered the “Goldilocks” Economic Period, symbolizing stability, with growth in manufacturing, construction, and agriculture sectors.
• India’s Reserve Bank implemented a strategic approach to inflation, raising the repo rate by 250 basis points over 11 months, resulting in an inflation rate of 4.8% in June 2023.
• With a median age of around 28 years and two-thirds of the population in the working-age category, India’s young population serves as a catalyst for potential growth, especially in manufacturing.
• An ambitious allocation of 1.7% of GDP on transport infrastructure shows India’s focus on overcoming historical inadequacies in transportation, water, and power, aiming to achieve a $5 trillion economy.

Overview

Delving into India’s economic trajectory unveils a remarkable journey characterized by growth, challenges, and the pursuit of sustainable development. With a population of over 1.4 billion and a rich cultural heritage, India has surged onto the global economic stage, demonstrating its prowess and determination. The year 2023 marks a pivotal juncture, with India’s GDP soaring and solidifying its position as a frontrunner in the global economic landscape. This article delves into India’s economic rise, demographic advantages, infrastructure investment, challenges hindering growth, and concludes by offering strategic suggestions to fortify its path forward.

India’s Economy is Ranked as Fifth-Largest Economy in the World 

India’s economy demonstrated significant growth in the fiscal year 2022-23, with a 6.1% expansion in the Q4 leading to an annual growth rate of 7.2%, a notable increase from the 4.5% growth in the previous quarter. The Q4 GDP for the current fiscal year was estimated at ₹43.62 lakh crore, compared to ₹41.12 lakh crore in the previous year. The Indian economy is experiencing a “Goldilocks” period, a situation that is not too hot or too cold, symbolizing stability. Growth in manufacturing and sectors like construction and agriculture are driving this momentum.

In the most recent quarter, there was a surge in growth by 6.1%, a figure that exceeded market expectations by 100 basis points. This uptick was widespread, with sectors such as manufacturing, construction, and agriculture leading the charge. The significant progress in the manufacturing sector was particularly heartening, considering its tepid performance in earlier quarters.

Regarding expenditure, despite international challenges, exports thrived. Meanwhile, due to the decline in crude oil prices, imports saw their most sluggish growth since December 2020, which consequently reduced India’s import bills. In fiscal year 2022-23, private consumption displayed a more modest growth of 7.5%. While urban consumption remained steady, rural demand has been trailing, albeit with recent indications of a resurgence.

Highlighting the country’s economic advancement, Finance Minister Nirmala Sitharaman’s office announced on June 12, 2023, that India’s GDP had reached the $3.75 trillion mark, elevating India to the position of the fifth-largest economy in the world. The nation’s GDP now ranks only below the economies of the US, China, Japan and Germany. Indian economic growth has been driven by various sectors, including its strong economic foundations, thriving domestic demand, careful financial management, high saving rates, and favorable demographic trends. Besides, traditional and modern agriculture, technology services, the handicraft industry, and business outsourcing are also major contributors to India. 

India’s Inflation Control: Navigating Global Volatility for Economic Stability

In the global dance to control inflation, India has notably demonstrated better success with a strategic approach that sets it apart from major Western central banks. The Reserve Bank of India (RBI) began intervening in May 2022, and through a series of six increases over 11 months, has raised the repo rate by 250 basis points. As a result, inflation in India was measured at 4.8% in June 2023, significantly lower than the previous fiscal year. This relatively moderate tightening reflects a carefully calibrated approach to combating inflation without unduly restraining economic growth or causing panic in capital markets. The agility and responsiveness shown by the RBI stand in contrast to more aggressive measures by the US Federal Reserve, European Central Bank, and the Bank of England, which collectively hiked policy rates by 1440 basis points within 18 months.

India’s success in taming inflation through these measured steps has broader implications for its economic development. Controlled inflation creates a more predictable business environment, thereby boosting investor confidence and fostering domestic growth. It allows for a more balanced approach to monetary policy that acknowledges the multifaceted needs of a growing economy. Moreover, it ensures that capital doesn’t flee too quickly from emerging markets, preserving financial stability. On the flip side, vigilance must remain as global inflationary pressures and domestic factors can still pose challenges. The RBI’s careful navigation illustrates a mature understanding of the complex interplay between inflation control, growth promotion, and financial market stability, positioning India as a resilient economy in a fluctuating global landscape.

India’s Demographic Advantage: The Cornerstone for India’s Economic Growth

India’s demographic advantage, characterized by a youthful and burgeoning working-age population, stands as a critical pillar of the country’s economic growth trajectory. In India, the demographic transition is happening more gradually and over a longer time period than the rest of Asia. This is primarily due to a more gradual decline in death and birth rates in India compared with the rest of Asia. Unlike aging economies like China and the U.S., India has a median age of around 28 years, with nearly two-thirds of the population falling in the working-age category. This has translated into a substantial labor force that can drive industrial and economic activities. 

India’s demographic edge is not merely a statistical advantage but serves as a catalyst for transforming the country into a potential manufacturing hub. The government’s initiatives such as “Make in India” align with this demographic potential, aiming to foster innovation, skill development, and job creation in the manufacturing sector. Despite concerns over modest growth in previous quarters, recent data has shown a reassuring trend in manufacturing, and this aligns well with the vast labor pool ready to be employed. The move towards becoming a manufacturing powerhouse has opened up avenues for global competitiveness and domestic value addition.

As noticed before, India’s demographic transition is occurring more gradually than in the rest of Asia, due to a slower decline in birth and death rates. While this ensures sustained population growth, the focus shifts to the crucial task of productively employing the labor force. Upskilling and creating opportunities for absorption into various industries become essential. This long window offers India the time to scale up manufacturing, expand services, and continue infrastructure growth, fostering job creation and effectively harnessing the potential of its vast labor force. The combination of these factors reinforces India’s demographic advantages as a cornerstone for its economic development.

Infrastructure Investment Fuels India’s Economic Transformation

India’s recent focus on infrastructure improvement represents a significant stride toward overcoming historical inadequacies in transportation, water, and power. The ambitious allocation of 1.7% of its GDP on transport infrastructure alone this year sets the country apart from many Western counterparts, including America and most European nations(Source: The Economic Times). Such an ‘eye-watering’ upgrade, as noted by The Economist, includes initiatives like constructing highways, modernizing railways, expanding metro networks, and improving water supply systems. These projects not only enhance connectivity and efficiency but are instrumental in creating jobs, boosting the manufacturing sector, and stimulating growth in ancillary industries.

This robust investment in infrastructure aligns with India’s goal to achieve a $5 trillion economy, and the transformative effect on economic growth and development is multifaceted. Improved transport infrastructure facilitates quicker and more cost-effective movement of goods and people, enhancing the business environment, and making India a more attractive destination for foreign investment. Enhanced power supply ensures the reliable operation of industries, while better water management contributes to agricultural productivity. Collectively, these improvements create a conducive ecosystem for sustained growth, drive urbanization, and contribute to rural development. The deliberate infrastructure push signals a comprehensive approach to leveraging physical capital as a catalyst for economic expansion and positions India to capitalize on its other inherent advantages, such as its demographic dividend and potential as a manufacturing hub.

Challenges to India’s Economic Growth

One of the significant challenges facing India’s growth trajectory includes an urgent need for improvements in education, particularly addressing the stagnation in rural education levels, which along with persistently high levels of poverty, continues to widen the social and economic divide. Global companies operating in India also face ongoing challenges such as accessing raw materials, finding reliable suppliers, and navigating complex policies and regulations, despite improvements in the Ease of Doing Business ranking. Furthermore, India continues to grapple with bureaucratic hurdles and red tape, along with concerns about restrictions on freedom of speech and the perceived erosion of democratic values. These multifaceted challenges, encompassing education, poverty, business environment, governance, and democratic principles, must be addressed to sustain India’s economic growth and ensure it remains an attractive destination for global businesses and investors.

India’s economic growth future outlook

According to insights from Deloitte, India’s GDP is on the path to a strong recovery following a dip between 2020 and 2021 due to the COVID-19 pandemic. The gradual rebound from the economic shock is evidenced by positive momentum in the first-quarter data. There is optimism surrounding India’s economic prospects for the year, with growth projections for FY 2023–24 ranging between 6.0% and 6.3% in the baseline scenario. This growth trend is expected to continue, with GDP expansion forecasted at 6.6% to 7.2% over the subsequent two years, supported by a buoyant global economy.

Indian Stocks: Investing in India with I Know First

I Know First provides predictions for the Indian stock market based on the AI algorithm for six horizons: 3-day, 7-day, 14-day, 1-month, 3-months, and 1-year. I Know First has constructed four forecast packages that cover Indian stocks: Indian Stocks, India Large Cap Stocks, India Mid Cap Stocks, and India Small Cap Stocks. Below, we can observe the performance of the prediction of these packages which were sent to our clients (you can access our forecast packages here).

Package Name: By Country – Indian Stocks
Recommended Positions: Long
Forecast Length: 3 Months (5/18/23 – 8/18/23)
I Know First Average: 49.71%

Package Name: By Country – India Small Cap Stocks
Recommended Positions: Long
Forecast Length: 1 Year (8/18/22 – 8/18/23)
I Know First Average: 44.51%

Package Name: By Country – India Mid Cap Stocks
Recommended Positions: Long
Forecast Length: 1 Month (7/13/23 – 8/13/23)
I Know First Average: 5.15%

Package Name: By Country – India Large Cap Stocks
Recommended Positions: Long
Forecast Length: 3 Months (5/19/23 – 8/20/23)
I Know First Average: 25.16%

Conclusion

In summation, India’s economic trajectory, as showcased in 2023, is commendably robust, buoyed by strategic financial management, demographic advantages, and deliberate infrastructure investments. Navigating challenges such as inflation and global volatility with aplomb, the nation stands out as an economic frontrunner. Coupled with a young workforce and ambitious infrastructure projects, the country is poised for sustained growth. Despite existing challenges, the long-term outlook remains optimistic, making it an opportune moment for investors to consider capitalizing on India’s stocks and be part of its flourishing economic journey. I Know First provides forecast packages for finding the most promising investment opportunities on the Indian stock market.

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