India at 77: A rising economic force

India’s growth story can’t be avoided today, even if there might be some skepticism surrounding it.

Recent developments are a testament to the country’s growing global economic prominence – be it a reference to US-India economic deals in chip assembly, critical minerals and other areas, Tesla’s strong indications to potentially invest in India, or the newly released United Nations Conference on Trade and Development report indicating that India managed to attract the third highest announced greenfi eld investments globally in 2022.

What the growth numbers tell us

India’s economy grew by 9.1 per cent in 2021-22 and 7.2 per cent in 2022-23 in real GDP terms, positioning itself within the fastest-growing economies globally.

While some of this growth can be discounted, considering the low GDP base from the pandemic and lockdowns which created a growth rebound effect, it is important to bear in mind that these circumstances were not unique to India. Looking at the present conditions, the country is forecast to grow at anywhere between 6-6.5 per cent for 2023-24, giving the country a ‘bright spot’ economy status at a time when China, for example, is exhibiting uneven recovery, Germany enters a recession, and the US potentially narrowly avoids one.

A look at the size of economies, measured in terms of nominal GDP, also reveals how India is emerging as a global economic heavyweight.

India will join the US and China by 2027 in the league of the top three largest economies. It is clear from the data that India will still trail much behind the US and China in economic size, however, the ‘catch-up’ growth by India can’t be ignored, especially as it goes on to displace Japan and Germany before the close of this decade.

What’s driving the Indian economy?

Domestic demand-driven resilience has been a key factor in supporting India’s growth. Private final consumption expenditure (or PFCE, which is a measure for household spending or demand), accounting for about 55-60 per cent of the Indian economy, has displayed continuous quarterly growth (for example, comparing Q1 of 2022-23 over Q1 of 2021-22) following the contraction induced by the first wave of Covid-19.

PFCE growth in Q1 2021-22 (April to June 2021) stood at an impressive 17.6 per cent according to India’s Ministry of Statistics and Programme Implementation, despite the second Covid-19 wave, which had set in by this time. These figures were also helped by the rebound seen from 2020 data.

Despite the outbreak of the Russian-Ukrainian crisis and resulting external headwinds, PFCE has continued to be resilient. There has been a moderation in PFCE growth in more recent quarters, which can partly be pegged to high interest rates.

Over the longer term, India’s domestic demand will receive a boost from its demographic advantages in terms of its large, growing population (compared to China’s depopulation) and rising working age cohort share, as well as middle class boom.

While PFCE growth moderated in Q3 and Q4 of 2022-23, gross fixed capital formation (or GFCF, which refl ects investments) posted robust growth, especially supported by the government’s capital expenditure push. In fact, for 2022-23, GFCF share in GDP came in at 34 per cent which was a 10-year high.

The government’s strong capital expenditure drive will remain a key growth driver in the ongoing fiscal year as well. India’s manufacturing sector managed to reverse the contraction seen in Q2 and Q3 2022-23, posting 4.5 per cent growth in Q4 2022-23.

Over the long term, the manufacturing sector is poised to benefit from the pivot beyond China, as businesses seek to build a China+1 strategy with diversified production bases. Recent and potential investments into India by companies such as Apple and Tesla are indicative of this shift.

Challenges ahead

While India’s macroeconomic fundamentals, as well as growing manufacturing policy support, put it at a very advantageous position to capture some investments away from China, India’s manufacturing share in GDP considerably lags behind China. This impact is more profound when considering the relative size of the two economies.

Businesses operating in China, therefore, could benefit from a stronger manufacturing ecosystem, a deeper network of raw material and input suppliers, and greater economies of scale.

Adding to this is competition for India from Southeast Asia and other global locations in the era of supply chain diversification.

Southeast Asian economies managed to attract investments during the earlier wave of diversification following the US-China trade wars. Aside from competitive labour costs, these economies also compete with India with regard to economic growth, demographic advantages and a burgeoning middle class. So as the country strives to grow its manufacturing base, it will also become increasingly important to enhance its competitive differentiation against other go-to locations.

Additionally, with regard to doing business in India, regulatory challenges are seen as a deterrent to operations. This often arises from the complexity and excessiveness of regulations.

While strides have been made for easing the regulatory burden, more reforms are required.

The automotive industry is a lynchpin of the manufacturing sector and is a sizeable GDP and employment contributor in India.

There tends to be a strong correlation between GDP growth levels and car sales, so it’s not too surprising that April-June 2023 passenger vehicle sales growth stood at a robust 9.4 per cent, as per data from the Society of Indian Automobile Manufacturers, following the last released GDP data for January-March 2023 when the economy beat expectations and grew by 6.1 per cent.

The sustainability-driven policy thrust in the automotive industry is evident through demand-side electric vehicle incentives from the FAME (Faster Adoption and Manufacturing of Electric Vehicles) scheme and the subsequently launched production linked incentive scheme for automobiles and auto components, which prioritises electric and hydrogen fuel cell vehicles and components.

It is also interesting to examine how socioeconomic trends will play a role in influencing the future of the Indian industry.

While India’s young demographic is advantageous for tech startups in terms of both talent pool as well as consumer demand, the silver economy also presents business opportunities considering India’s growing elderly population and the fact that India is home to the second largest elderly population size globally.

Senior living projects, geriatric care, and lifestyle products suited to the aged population are some key segments that will witness demand growth.

Fuelled by a combination of factors such as an increasing number of high-networth individuals, strong GDP growth, and aspirational living, India’s luxury market is also set for demand growth.
The robust economy, for example, is seen to be playing a vital role in boosting 2023 luxury car sales.

In summary, while there has been some recent tempering in consumption-driven growth in India, investment-led growth will step in to help maintain robust growth in 2023-24. Longer-term consumption prospects, nonetheless, remain strong, especially driven by demographic forces.

Against this context and given the relief of a large, stable economy in the context of global slowdown, corporates are expected to increasingly bet on India for supply chain diversification and resilience in the era of a China+1 movement.

Neha Anna Thomas is a senior economist and programme manager, Economic Analytics, Frost & Sullivan.