Economic Survey 2023-24 – The Best is Yet to Come

23 Jul 2024 , 09:47 AM

The Economic Survey is normally tabled in the house, a day ahead of the actual budget presentation. In India, the Modi 3.0 government presents the full budget on July 23, 2024. Hence, a day ahead of the full budget presentation by the Finance Minister, the Economic Survey 2023-24 was tabled in Parliament by Nirmala Sitharaman. Before we turn to the highlights of the Economic Survey, the message was that the post-pandemic recovery had been achieved by the Indian economy in an appreciable way. However, the survey also closed on an optimistic note, saying that the best was yet to come.

• INDIAN ECONOMY: STEADY, ELEGANT, AND BALANCED

Why does the Economic Survey 2023-24 underline that the India macro story has been steady? India has been the fastest growing large economy for 3 years in a row, even amidst global challenges like weak demand, an ongoing Ukraine war and the uncertainty in the Middle East. Despite these headwinds, the real GDP for FY24 grew at 8.2%, with the gross value added (GVA) growing by an impressive 7.2% in FY24. One of the big achievements in the year was the ability to rein in inflation, despite intermittent monsoon-related price volatility. The CPI headline inflation came down from 6.7% in FY23 to 5.4% in FY24. For the more discerning analysts, another major achievement was that the Current Account Deficit (CAD) was controlled at just 0.7% of GDP in FY24; even reporting a surplus in Q4. CAD was sharply lower than the 2% of GDP in FY23. during FY24, an improvement from the deficit of 2.0 per cent of GDP in FY23. The real GDP in absolute terms is about 20% higher than in FY20, implying that the recovery from the post-COVID lows has been decisive and also affirmative. India is also shifting towards a direct tax driven economy with 55% of tax revenues of the government coming from direct taxes and only 45% from indirect taxes.

• RBI WORKED HARD ON MONETARY STABILITY

Monetary stability requires the support and the buy-in of the RBI and the RBI played a yeoman role in containing inflation and holding on to its hawkish stance, even amidst rising pressure from industry bodies. The net effect was that it did a good job in ensuring that the inflation number and also the inflation expectations were kept in control. Unlike the other countries where there have been concerns of a hard landing due to a tight money policy, Indian economy has grown at a robust pace, even in the midst of inflation control measures adopted by the RBI. The repo rate remains at 6.5%, but if inflation is in check then we could see the first rate cuts happening later this year. Banks had the benefits of rapid growth in bank credit and the gross NPAs of banks at multi-year lows.  The one challenge for the banking sector in India has been the slow growth in bank deposits, which has led to a distortion of the credit / deposit ratio of the banks.

• FINANCIAL INCLUSION IS ON THE RISE

Amidst the uncertainty surrounding the deposit ratio and the falling credit/deposit ratio, there is a silent trend towards greater financial inclusion and greater financialization of savings, as captured in the table below.

Fiscal Year	Savings in Physical Assets (₹ Trillion)	Savings in physical assets (% of GDP)
FY12	13.89	15.90
FY13	14.65	14.73
FY14	14.16	12.61
FY15	15.13	12.14
FY16	13.18	9.57
FY17	15.95	10.36
FY18	19.44	11.38
FY19	23.09	12.22
FY20	22.52	11.20
FY21	21.35	10.76
FY22	29.68	12.58
FY23	34.83	12.93

Data Source: MOSPI

From a longer term perspective, the financialization of assets is visible in the way the share of physical assets of household has consistently come down. One more indicator has been that the Indian microfinance sector has emerged as the second largest in the world after China. That is an affirmation sign of financial inclusion happening at the grassroot level.

• EXTERNAL SECTOR STABILITY AMIDST HEADWINDS

The Indian external sector has seen a sharp growth in remittances and a sharp growth in the services surplus, which has compensated for the merchandise trade deficit. What was notable was the efforts of the government to boost exports and cut imports of defence items through import substitution. The year saw India’s external sector stable amidst a plethora of global headwinds, geopolitical risk, and sticky imported inflation. India improved 6 ranks in the World Bank Logistics Performance Index to 38th position out of 139 countries. One outcome was that the CAD narrowed to just 0.7% of GDP in FY24 from 2.0% in FY23. India saw its share in global merchandise exports rise by 10 bps to 1.8%, even as services exports touched a record $341 Billion in FY24. Above all, the external debt has been sustainable over the years; with external debt to GDP ratio at 18.7%. Going ahead, India has a big challenge. It needs to boost GDP by also boosting jobs in the process. The government needs to tap the full potential of agriculture sector, address MSME bottlenecks, manage the green transition, and also tackle inequality to ensure higher per capital incomes.

• AGENDA FOR FUTURE – CLIMATE CHANGE AND GREEN ENERGY

Under the stewardship of Mr Modi, India has taken its green initiatives very seriously. According to the International Finance Corporation (IFC), India is the only G20 nation in line with 2-degree centigrade warming. As of the end of FY24, India’s share of non-fossil sources in the installed electricity generation capacity had reached 45.4%, even as India has reduced the emission intensity of its GDP from 2005 levels by 33% in 2019. Interestingly,  if you look at the period between 2005 and 2019, India’s GDP grew at a CAGR of 7% while the emissions grew at a CAGR of just about 4%. With its clean energy initiatives, India has managed annual savings of 51 Million tonnes of oil equivalent, which effectively translates into a total annual cost savings of ₹1,94,320 Crore and emissions reduction of 306 Million tonnes. The sovereign green bonds program of the government also get a good response.

• THREE PILLARS – EQUITY, HEALTH, AND EDUCATION

India has made rapid strides on these 3 pillars through greater digitisation of healthcare, education, and governance. That has been a force multiplier and boosted the impact of money spent by the government. For instance, between FY18 and FY24, the nominal GDP grew at a CAGR of 9.5% while the welfare expenditure grew at a CAGR of 12.8%. Even the popular inequality indicator, Gini coefficient, fell from 0.283 to 0.266 for rural sector and from 0.363 to 0.314 for the urban sector. On mass healthcare, over 34.7 Crore Ayushman Bharat cards have been generated, and the scheme has covered 7.37 Crore hospital admissions. A key to investing in the future is the level of R&D. To be fair, India has made rapid progress in R&D, with nearly 1,00,000 patents granted in FY24, compared to less than 25,000 patent grants in FY20. Government outlay for R&D at ₹3.10 Trillion is up 219% over FY14.  Also, the PM-AWAS-Gramin has constructed  2.63 Crore houses for the poor in last 8 years. Clearly, the social and soft infrastructure has got a big boost in FY24.

• CREATING JOBS, AND INVESTING IN SKILL DEVELOPMENT

Indian labour market indicators have improved in the last 6 years, with the unemployment rate falling to just about 3.2% in FY23. The table below captures some key highlights.

Variable	Fiscal Year	Ratio (%)
LFPR	2017-18	48.4
	2018-19	48.5
	2019-20	51.2
	2020-21	51.8
	2021-22	51.7
	2022-23	54.6
WPR	2017-18	44.1
	2018-19	44.3
	2019-20	46.7
	2020-21	47.9
	2021-22	48.3
	2022-23	51.8
UR	2017-18	8.7
	2018-19	8.7
	2019-20	8.8
	2020-21	7.5
	2021-22	6.6
	2022-23	5.1

Data Source: PLFS Annual Reports

What is the quick reading from the above table. Firstly, let us look at the labour force participation ratio. That has sharply increased from 48.4% in FY18 to 54.6% in FY23. At the same time, the worker to population ratio (WPR) has gone  up sharply from 44.1 to 51.8% between FY18 and FY23. At the same time, the unemployment rate has also fallen sharply and further in FY24. This also includes sharp improvement in the rate of employment of the youth population aged between 15 and 29, which is indicative of the demographic dividend. Let us also quickly look at how the wages have grown.

Year	Total	Rural	Urban
2017-18	6.0%	6.3%	5.9%
2018-19	6.9%	7.4%	6.4%
2019-20	4.0%	5.2%	3.0%
2020-21	0.8%	2.1%	0.1%
2021-22	10.0%	10.5%	9.4%

Data Source: Annual Survey of Industries

What do we decipher from the above data. The higher jobs have been accompanied by a sharp spike in the wages. That has longer term positive implications for spending power, consumer demand and the quality of life.

• HANDLING INDIA’S FOOD BASKET

The Indian food basket has two major challenges in terms of supply and prices. Supply has improved but prices have been rampant and that is visible in the food inflation sharply higher than the other inflation items in the basket. However, agri growth has been something to write home about. For example, average annual growth rate of 4.18% in agriculture output in real terms, is very strong. Even the total credit disbursed to agriculture amounted to ₹22.84 Trillion.

• MORE SUPPORT NEEDED FROM THE MANUFACTURING SECTOR

Economic growth of 8.2% in FY24 was supported by industrial growth at 9.5%, which formed a solid base. Indian manufacturing sector achieved an average annual growth rate of 5.2% in last 10 years; with the growth being driven by sectors like chemicals, wood products, transport equipment, pharmaceuticals, machinery, and equipment. The production of coal and the generation of electricity have been at record levels in the last one year. India has seen a sharp improvement in the exports of engineering products and electronic goods. Today, the electronics manufacturing sector accounts for 3.7% of global market share; and growing rapidly. The production linked incentives (PLI) scheme has already attracted over ₹1.28 Trillion of investment until May 2024, with positive ramifications for exports and creation of jobs in India.

• SERVICES BACK WITH A VENGEANCE AFTER THE PANDEMIC

The services sector now contributes about 55% to the GVA, same as the pre-pandemic levels. In fact, the service sector took the biggest hit after the pandemic, especially the contact intensive sectors. Post the pandemic, they have also been the fastest to recover.

Financial Year	Agriculture (GVA Growth – %)	Industry (GVA Growth – %)	Services (GVA Growth – %)
FY20	6.16	-1.40	6.43
FY21	4.01	-0.44	-8.35
FY22 (2nd RE)	4.62	12.24	9.18
FY23 (1st RE)	4.71	2.11	10.01
FY24 (PE)	1.44	9.51	7.58

Data Source: MOSPI

From the above table, it is evident how the services sector has sustained the fastest growth after the correction in the pandemic period. Globally, India’s services exports constituted about 4.4% of world’s commercial services exports in 2022 and the figure has grown in the last two financial years. The services exports are dominated by computer services and business services exports, at 73%. Another stand-out growth story has been aviation as passenger traffic grew 15% and air cargo grew 7% annually. The tourism industry witnessed over 92 Lakh foreign tourist arrivals in 2023, which is 43.5% higher than last year. Even residential real estate sales were at their highest level since 2013, growing at 33%, with over 4.1 Lakh units sold in the top eight cities. The much talked about Global Capability Centres (GCCs) in India have grown significantly, from 1,000 centres in FY15 to more than 1,580 centres by FY23. With robust telecom infrastructure and reasonable pricing, the overall tele-density (number of telephones per 100 population) in India increased from 75.2% in March 2014 to 85.7 per cent in March 2024; even as the internet density has increased to 68.2%. The Indian services growth story is being triggered by a combination of rapid technology-driven transformation of domestic service delivery and the diversification of India’s services exports.

• INFRASTRUCTURE – THE BIG FORCE MULTIPLIER

If there is one big story in the last few years it is the government investments in capex. In short, robust public sector investment has played a pivotal role in funding large-scale infrastructure projects in recent years. For instance, the average pace of national highways construction increased 3 times from 11.7 km per day in FY14 to around 34 km per day in FY24. It has a huge multiplier effect. Railway capex alone is up 77% in the last 5 years.

The list can go on. The message of the Economic Survey 2023-24 is that India is a story that is waiting to happen. The next few years could be critical!