New Delhi, Jan 7,2023: If any major middle-income country is truly outperforming in the coming decades, it’s the world’s soon-to-be third largest economy (and its largest democracy), India, Eurasia Group said in a report.

“In my view, 2023 will be remembered for India’s emergence as the third pole of the world,” wrote Shigesaburo Okumura, Editor-in-Chief of Nikkei Asia, in a recent article.

Another important factor not to be neglected is India. This year will likely be remembered for marking its emergence as the world’s most populous nation, Okumara wrote.

According to the UN, China’s population last year was 1.426 billion while India’s was 1.417 billion. In July, the UN forecast that China’s population would fall in 2023 while India’s would surpass it.

By 2050, the UN expects India will have 1.6 billion residents and China 1.3 billion.

A growing working-age population is an important source of economic growth, so India’s emergence will give it new power in international politics, Okumara said.

Moreover, decoupling between the US and China and the rebuilding of technology supply chains to exclude China benefits India. Apple is building iPhone 14s in India.

Natarajan Chandrasekaran, chairman of Tata Sons, has talked of plans to produce semiconductors in the subcontinent.

In March, India will host the plenary session of the Trilateral Commission for the first time. This year, it is also chairing the Group of 20, a role that will involve a leaders’ summit and many ministerial meetings. The Modi government will be eager to show leadership ahead of India’s own elections in 2024, Okumara wrote.

“The new year thus could mark the beginning of a tripolar world, involving the US, China and India. New Delhi is undeniably on the rise,” Okumara concluded.

Challenges, however, are mounting for India’s economy with the GDP forecast at a half-century low.

Motilal Oswal Financial Services forecast in a note that after growing strongly for two consecutive years, India’s real GDP growth would decelerate to 5.2 per cent YoY in FY24, while nominal GDP growth would weaken even sharply to 7-7.5 per cent, led by easing inflation.

A combination of factors such as slower global economy, fading pent-up demand and normalising base effects would contribute to slower real growth.

With an expected retail inflation print at just 4.3 per cent and a mere 1 per cent growth in the wholesale price index (WPI) in FY24, the GDP deflator could be around 2 per cent, dragging down India’s nominal GDP growth to the lowest level compared to any year between the early 1970s and FY19 (that is, half-a-century pre-Covid period), the report said.

Such slow growth rate would have some serious implications for the macro economy and financial markets.

“Overall, we believe that unlike the past 12-15 months, the narrative will reverse in FY24. Inflation concerns will take a back seat and growth worries will resurface. This may be true not only for India, but also for the entire global economy. At the same time, restrictive monetary policy will fail to boost financial markets. Accordingly, CY23 could be very painful,” the report said.

Revenue of listed companies is highly correlated with nominal GDP growth (and WPI-inflation). In case of single-digit nominal GDP growth, corporate sales growth is also expected to weaken from an average of >30 per cent YoY in the past seven quarters to single digits in FY24.

With an expectation of weaker nominal GDP growth in FY24, we estimate India’s debt growth to also weaken. Thus, bank credit growth could also moderate from 15-16 per cent in FY23 to 12 per cent in FY24 with a downward bias, the report said.

As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, according to
a comprehensive new study by the World Bank in September.

Several historical indicators of global recessions are already flashing warnings. The global economy is now in its steepest slowdown following a post-recession recovery since 1970.

Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. The world’s three largest economies — United States, China, and the Euro zone — have been slowing sharply.

The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent period of stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak.

The 1982 global recession coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020. It triggered more than 40 debt crises and was followed by a decade of lost growth in many developing economies, the World Bank said.

India’s current account deficit expectedly swelled to a 37-quarter high of $36.4 billion (4.4 per cent of GDP) in Q2 FY23 from $18.2 billion in Q1 FY23 (2.2 per cent of GDP).

The resulting net balance of payments (BoP) position registered a deficit of $30.4 billion
(3.7 per cent of GDP), its weakest since the 2008 global financial crisis, compared to a surplus of $4.6 billion in Q1 FY23, Acuite Ratings said.

Amid an uncertain geopolitical environment and slowing global growth, however, risks will remain on both current account balance and capital flows, it said.

With excessive demand supply disparities, bloated supply chain management and battle against inflation weighing down on global economic growth, the New Year started on a gloomy outlook as IMF predicts global GDP growth topping at 2.7 per cent, narrowly escaping recession, Nuvama Professional Clients Group said in a note.

The economy has been supported by sturdy domestic demand as indicated in GST collections and consumer spending.

However, the industrial output contracted by 4 per cent YoY in October, the worst in over two years, hobbled by the drop in orders from western markets and weak investment at home, the note said.

Standard Chartered said in a report that 2023 global macroeconomic backdrop is likely to be challenging given the heightened risk of a slowdown as lagged effects of monetary policy tightening leads to a weaker demand scenario and lower corporate earnings performance.

As the monetary policy rate cycle peaks amid receding inflationary pressures in the second half of the year, risk sentiment could improve with the growth outlook stabilising.

“In our assessment,” the bank noted, “India’s growth-inflation dynamics is stable and better than its peers.”

The post-pandemic economic recovery cycle remains strong amid supportive government policies and a pick-up in investments. Further, the likely broadening of the rural economy’s recovery and of the service sectors is a strong tailwind, the note said.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)