What Lies Ahead For Indian Economy As Nation Celebrates 76 Years Of Independence

World Bank, in its Global Economic Prospects report released in January, said India is expected to grow by 7.5% in 2023, driven by strong domestic demand and a rebound in investment. 

Independence Day 2023: As India commemorates its 77th Independence Day, the nation stands at a critical juncture in its economic journey. The global economy faces challenges of elevated inflation, high debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentation, and extreme weather conditions. However, financial institutions like the IMF have called India a 'bright spot' in the global economy. 

In its World Economic Outlook report released in January 2023, the IMF said that India is expected to grow by 6.8 per cent in 2023. It also said that India is expected to contribute 15 per cent of global growth in 2023. World Bank, in its Global Economic Prospects report released in January 2023, said that India is expected to grow by 7.5 per cent in 2023, making it the fastest-growing major economy in the world. The World Bank also said that India's growth is being driven by strong domestic demand and a rebound in investment. 

So, as we celebrate 76 years of our Independence from the British, let us see what global institutions think about what lies ahead Indian economy. But before that, let us first a brief look at how far we have come along. 

India Since 1947

After gaining independence from colonial rule in 1947, India embarked on a journey of economic reconstruction. Many historians note that almost two centuries of British rule shifted India from one exporting processed goods to exporting raw materials, leading to a great economic decline. The exploitation under British rule caused famines, low life expectancy, malnutrition, and illiteracy in India. According to British economist Angus Maddison, India's share of world income dropped from 27 per cent in 1700 to 3 per cent in 1950. 

Under Prime Minister Jawaharlal Nehru's leadership, India adopted a centralised planning, utilising five-year plans inspired by the USSR. The first Five-Year Plan in 1952 targeted agrarian challenges, investing in irrigation, dams, and infrastructure. Modern industries, scientific institutions, and space programmes were also priorities. However, progress was hindered by limited capital, Cold War dynamics, defense spending, population growth, and infrastructure gaps.

According to a government estimate, between 1951 and 1979, annual GDP growth averaged 3.1 per cent, with industry at 4.5 per cent and agriculture at 3.0 per cent. The 1980s saw an improved growth rate, averaging 5.5 per cent, supported by increased investment reaching 25 per cent of GDP. Private savings initially funded investments, but reliance on foreign borrowing grew, leading to a 1990 balance of payments crisis.

Then finance minister Dr. Manmohan Singh's 1991 budget marked a turning point, liberalising the economy and promoting overseas investment. India's GDP surged, growing from $267.52 billion in 1992 to $1.85 trillion in 2012.

Over the past decade, India maintained an average GDP growth rate of 6-7 per cent. Between 2006 and 2023, the average was 6.15 per cent, peaking at 8.7 per cent in 2022 and dipping to -6.6 per cent in 2021 due to COVID. 

India surpassed the United Kingdom, securing the position as the fifth-largest global economy, earlier this year. Among economies larger than India's are only the United States, China, Japan, and Germany. 

This graph prepared by the World Bank national accounts data and OECD National Accounts data files shows how far we have come since Independence. While these GDP data give us a snapshot of the growth, a larger picture can only be understood by looking at the aspects of poverty alleviation, food security, industrial growth, agriculture growth, and global trade. While the country has more than improved on every front, there is still work to be done. 

According to a UNDP report, a total of 415 million people moved out of poverty in India within just 15 years from 2005 to 2016. In 2005-2006, the report said, about 645 million people were in multidimensional poverty in India, with this number declining to about 370 million in 2015-2016 and 230 million in 2019-2021. India has notably become one of the successful producers is for food items, recently becoming the world’s leading country in milk production. Yet a concerning finding from the fifth National Family Health Survey (NFHS-5) conducted from 2019 to 2021 reveals that 18 per cent of mothers with children aged 6-23 months reported their child had consumed no food in the 24 hours before the survey, noted a Lancet report in March. This 'zero-food' prevalence was even higher at 30 per cent for infants aged 6-11 months, 13 per cent for those aged 12-17 months, and 8 per cent for children aged 18-23 months.

India's industrial sector has experienced substantial expansion since 1947. Sectors like information technology, pharmaceuticals, and automobile manufacturing have demonstrated impressive growth. The multiple initiatives aimed to boost domestic manufacturing, attract foreign investment, and create job opportunities have helped in attracting foreign investments as well. 

This graph on Foreign direct investment (FDI) net inflows shows how foreign Investments have come in since the 1970s, with high inflows during 2008 and 2020. 

A recent analysis by the Centre for New Economics Studies (CNES), OP Jindal Global University delves into a comprehensive examination of India's growth trajectory over the last three decades. It compares India's growth trends with those of other industrially developed economies across various sectors such as manufacturing, services, and banking, while also drawing comparisons with similar nations.

The analysis primarily focuses on India's performance since the 1990s, dissecting growth from both income and expenditure standpoints. It underscores the service sector's remarkable growth, reaching as high as 15 per cent by 2020, thanks to increased organised employment opportunities and foreign investments. This has contributed to urban-centered growth, resulting in the rise of cities. However, in contrast, the agricultural and manufacturing sectors have experienced declines in size and growth rates. 

What Global Institutions Say About Indian Economy Going Forward 

According to the International Monetary Fund's (IMF) World Economic Outlook report, India is projected to be the world's fastest-growing economy, despite facing challenges like financial sector turbulence, inflation, and challenges birthed by the Russia-Ukraine conflict. The IMF's latest report, released on April 11, estimates India's economy to grow by 5.9 per cent in the current fiscal. Due to higher interest rates causing reduced economic activity, the IMF revised its 2023 global growth forecasts, while also warning that severe financial turmoil could push economies toward recessionary levels.

However, IMF Managing Director Kristalina Georgieva commended India for effectively using digitalisation to navigate the Covid-19 pandemic's challenges. This approach not only helped India overcome difficulties but also led to fresh growth opportunities and increased employment. In an interview to PTI, Georgieva referred to India as a "bright spot" in the global economy, with the nation expected to contribute around 15 per cent to global growth in 2023.

According to the World Bank, India's economic growth forecast for the current fiscal year (ending March 31, 2024) is 6.3 per cent. The World Bank's South Asia Economic Focus report, titled "Expanding Opportunities: Toward Inclusive Growth", said that factors contributing to downgrading the country’s GDP by 0.7 per cent include higher borrowing costs, slower income growth affecting consumption, and the government's fiscal expenditure tightening. It also highlighted concerns about India's female labor participation rate dropping below 20 per cent and the lack of growth or reduction in size of the informal sector. Despite these challenges, India still outperformed other South Asian countries.

However, World Bank Chief Economist for South Asia Hans Timmer has said: “In general, the situation in India is better than in many of the other countries in South Asia and especially the situation in the financial sector is healthier than many of the other countries.” 

In March 2023, Moody's Investors Service upgraded India's credit rating to Baa3, which is investment grade. This upgrade was based on Moody's view that India's economy is resilient and that the government is committed to implementing reforms. However, the global rating major cut its GDP growth forecast for the economy to 6.8 per cet for 2022-23, from an earlier projection of 7 per cent. 

In April 2023, S&P upgraded India's credit rating to BB+, which is also an investment grade. Earlier this month, the rating agency in a report titled 'India’s Future: The Quest for High And Stable Growth' said: “The macro challenge for India in the upcoming decade is to turn traditionally uneven growth into a high and stable trend.”

It added: “We expect India to grow 6.7 per cent per year from fiscal 2024 to fiscal 2031, catapulting GDP to $6.7 trillion from $3.4 trillion in fiscal 2023. Per capita GDP will rise to about $4,500.” The report also said capital accumulation will be the dominant driver of Indian growth. S&P Global expects capital to contribute 53 per cent of India’s 6.7 per cent average GDP growth through the end of the decade. That dwarfs a 17 per cent contribution from labor, the other main factor of production. Increases in productivity will generate 30 per cent of GDP growth.