Maintaining the momentum

Several drivers will support growth

The year 2023 ended with better economic outcomes than initially anticipated. High inflation in advanced economies, particularly the US, was one of the biggest concerns at the beginning of the year. Monetary policy action to contain near double-digit inflation rates had the potential to materially tighten financial conditions, affecting global growth outcomes, creating foreign exchange financing problems in developing countries, and increasing financial market risks in general. Some of the risks did materialise, but things could have been much worse. A series of bank failures in the US, for example, did raise alarms, but was handled swiftly by the authorities. Global inflation rates, though still above target, have moderated significantly, which has led to the easing of financial conditions. The failure to foresee the surge in inflation did damage the credibility of central banks. However, the subsequent monetary policy actions taken to address and contain the situation have somewhat restored confidence.
 

India managed the fallout of policy action in advanced economies remarkably well. It is worth noting that 2023 was also the 10th anniversary year of the “taper tantrum” episode. However, India’s macroeconomic story in 2023 was very different from 2013. The current account deficit was much lower and the Reserve Bank of India (RBI) had built ample foreign exchange reserves, which helped contain currency market volatility in 2022 and 2023. The RBI, however, faced difficulties in bringing down the inflation rate close to the 4 per cent target, largely because of pressure from food prices. The pressure is likely to continue for some time. Stability on the external front helped policymakers focus on domestic drivers. Supported by the government’s higher capital expenditure, the Indian economy witnessed a robust real growth rate of 7.7 per cent in the first half of this financial year. The RBI now expects the economy to grow 7 per cent in the ongoing financial year. Strong economic growth also boosted sentiment in financial markets. The benchmark Nifty50, for instance, ended the year with 20 per cent gains.
 

Maintaining the momentum in 2024, however, would be a challenge despite some factors becoming favourable. As the latest RBI reports on banking and financial stability have shown, the Indian banking system is currently in its most favourable position in over a decade. Corporate balance sheets are also in good health, which should, theoretically, help restart the investment cycle. Global interest rates have peaked and financial conditions can be expected to ease, which should again help. Domestically, while the inflation rate is expected to moderate further, policymakers would do well to not rush with easing, given that the inflation rate has been on the higher side for at least the past three years.
 

On the flipside, India will have to continue to deal with slow global growth. According to the International Monetary Fund’s projections, the global economy will expand 2.9 per cent in 2024, compared to 3 per cent in 2023. Global trade, however, is expected to recover and this should help. The two ongoing wars in different parts of the world, along with their associated uncertainties, will continue to pose a significant risk. Ongoing shifts, such as geopolitical fragmentation and a slowdown in the Chinese economy, will continue to play out and affect economic outcomes. Domestically, this will be a year of Lok Sabha elections. A significant shift in policy orientation after the elections can have a bearing on economic outcomes.