India’s GDP growth forecast for the just-concluded financial year 2023-24 stands at a robust 7.8 percent, as per the latest Economic Outlook by the Organisation for Economic Co-operation and Development (OECD). However, the report warns of obstacles to higher growth due to global near-term developments.

The OECD report highlights that India’s domestic demand will be primarily driven by gross capital formation, particularly in the public sector, while private consumption growth is expected to remain sluggish. On the bright side, exports are projected to continue growing, especially in services such as information technology and consulting, bolstered by foreign investment.

Regarding inflation, the report anticipates a gradual decline in headline inflation, although uncertainties persist, particularly concerning food inflation. India’s consumer price index (CPI) inflation stood at 4.9 percent in March, slightly down from its recent peak of 5.7 percent in December 2023.

While retail inflation remains within the Reserve Bank of India’s (RBI) comfort level of two-six percent, it is still above the ideal scenario of four percent. The RBI’s monetary policy easing is expected to commence in the second half of the year, contingent upon sustained lower inflation.

The report suggests that a policy rate cut is likely in late 2024, with cumulative cuts of up to 125 basis points by March 2026, assuming normal monsoon conditions and no other supply shocks. However, the RBI is projected to maintain a neutral stance until 2025.

In addressing India’s development challenges, the report underscores the need for higher real GDP growth, particularly for job creation. It recommends avoiding export restraints and tax surcharges, reducing subsidies for fertilizers and pesticides, and rationalizing minimum price supports. Additionally, the report advocates for relaxing requirements to sell produce in state-regulated wholesale markets, accompanied by proactive communication, open dialogue with stakeholders, and regulatory safeguards.

With increasing dependence on Chinese industrial goods like telecom, machinery, and electronics, Beijing’s share in New Delhi’s imports of such goods rose to 30 per cent from 21 per cent in the last 15 years, according to a report by the economic think tank Global Trade Research Initiative (GTRI). The growing trade deficit with China is a cause of concern, and the strategic implications of this dependency are profound, affecting not only economic but also national security dimensions.

From 2019 to 2024, India’s exports to China have stagnated at around $16 billion annually, while imports from China surged from $70.3 billion in 2018-19 to over $101 billion in 2023-24, resulting in a cumulative trade deficit exceeding $387 billion over five years.

The Indian government and industries must evaluate and potentially recalibrate their import strategies, fostering more diversified and resilient supply chains, GTRI founder Ajay Srivastava said. This is imperative not only to mitigate economic risks but also to bolster domestic industries and reduce dependency on single-country imports, especially from a geopolitical competitor like China, he added.

“Over the last 15 years, China’s share in India’s industrial product imports has increased significantly, from 21 per cent to 30 per cent. This growth in imports from China has been much faster than India’s overall import growth, with China’s exports to India growing 2.3 times faster than India’s total imports from all other countries,” the report said.

In 2023-24, India’s total merchandise imports amounted to $677.2 billion, with $101.8 billion of that coming from China. This means China accounted for 15 per cent of India’s total imports. Out of these imports from China, $100 billion or 98.5 per cent were in major industrial product categories.

“When compared to India’s global imports of these industrial products, which total $337 billion, China’s contribution is quite significant, representing 30 per cent of India’s imports in this sector. Fifteen years ago, China’s share was just 21 per cent,” it added.

The key sectors where New Delhi’s dependence is rising significantly include electronics, telecom and electrical; machinery; chemicals and pharmaceuticals; products of iron, steel and base metal; plastics; textiles and clothing; automobiles; medical, leather, paper, glass, ships, aircraft, and remaining categories.

During April-January 2023-24, the electronics, telecom, and electrical products sectors had the highest import value at $67.8 billion, with China contributing $26.1 billion. “This represents a substantial 38.4 per cent of the total imports in this category, indicating a heavy dependence on Chinese electronic goods and components,” it said.

In the machinery sector, China accounts for $19 billion, which is 39.6 per cent of India’s imports in the sector. This underscores China’s key role as a supplier of machinery to India, Srivastava said.

India’s chemical and pharmaceutical imports during the period stood at $54.1 billion. Out of this, $15.8 billion came from China. This resulted in a Chinese share of 29.2 per cent, highlighting the importance of Chinese chemical and pharmaceutical products in India.

Similarly, the report said the total imports for plastics and related articles stand at $18.5 billion, with China providing articles worth $4.8 billion. This accounts for 25.8 per cent of the total imports in this sector.

Srivastava also said that half of the imports from China consist of capital goods and machinery, indicating a critical need for focused research and development in this area. Intermediate goods like organic chemicals, APIs (Active Pharmaceutical Ingredients), and plastics, which represent 37 per cent of imports, show a pressing need for upgrading these industries, he said, adding that consumer goods make up 12 per cent of the imports, while raw materials are less than 1 per cent.

The report added that many products imported from China, such as textiles, apparel, glassware, furniture, paper, shoes, and toys, are from categories dominated by micro, small, and medium enterprises (MSMEs), and most of these items could potentially be produced domestically.

“Overall, India imports a broad array of products from China, from high to low technology items, highlighting significant gaps in India’s industrial capabilities across various sectors,” it added.

Chinese companies are involved in India’s energy, telecommunications, and transportation sectors, and they play critical roles in smartphones, electronics, electric and passenger vehicles, solar energy, engineering projects, and many other sectors, it said.

The report said that so far, imports were carried out by Indian firms but now with the entry of Chinese firms into the Indian market, India’s industrial product imports are set to rise at an accelerated pace.

“As the Chinese firms operating in India will prefer sourcing most requirements from their parent firms, Indian imports will rise sharply. For example, in the next few years, every third electric vehicle (EV) and many passenger and commercial vehicles on Indian roads could be those made by Chinese firms in India alone or through joint ventures with Indian firms,” the report said.

The large-scale entry of Chinese automakers into India will impact the domestic auto/EV manufacturers, firms working in the EV value chain space and battery development, it added.

In contrast to the global scenario, the Indian economy continues to exhibit strong economic performance with broad-based growth across sectors, the Ministry of Finance asserted. “The optimism regarding growth prospects is also reflected in consumer and investor perceptions,” according to the Monthly Economic Review report of the Department of Economic Affairs under the Finance Ministry.

Many international organisations assert India’s pivotal role in determining the growth path of Asia in the coming years, the review report said. The Reserve Bank of India also, in its latest Monetary Policy Committee meeting, noted the strong growth momentum in the economy and projected real GDP growth for 2024–25 at 7 percent, driven by a pickup in rural demand and sustained momentum in the manufacturing sector. The International Monetary Fund, in its latest report, forecasted India’s growth at a high of 6.8 percent in 2024–25 and 6.5 percent in 2025–26, based on its assessment of continuing strength in domestic demand and a rising working-age population.

“As per the latest consumer confidence survey, households’ sentiments on the general economic situation and employment prospects recorded notable improvements for both the current period as well as the upcoming year,” said the monthly review report of the finance ministry. It further added that the manufacturing sector is also expected to maintain its momentum on the back of sustained profitability and a pickup in rural demand. On inflation, it said the government’s efforts to manage retail inflation in 2023–24 have been highly successful.

Inflation measured by the Consumer Price Index declined from 6.7 percent in 2022–23 to 5.4 percent in 2023–24, which is within the upper tolerance level of the inflation-targeting framework. 2023–24 ended with an inflation rate of 4.85 percent in March 2024, which is the lowest inflation rate recorded in the last 10 months.

However, inflation continues to remain the main concern for the Reserve Bank of India’s monetary policy committee members before it goes ahead and loosens its stance on key interest rates. In the minutes of the latest monetary policy meeting released recently, there have been several mentions of uncertainties around inflation. Going ahead, food price uncertainties would continue to weigh on the inflation outlook, according to the minutes. Retail inflation in India is at the RBI’s two-six percent comfort level but is above the ideal 4 percent scenario.

Inflation has been a concern for many countries, including advanced economies, but India has largely managed to steer its inflation trajectory quite well. Looking ahead, the RBI monetary policy committee sees food price uncertainties weighing on the inflation outlook. “While a record Rabi crop will help in moderating cereal prices, the increasing occurrence of weather shocks poses an upside risk to food prices.

Geopolitical tensions and their effect on oil prices add to this risk. However, Kharif crop prospects look bright at this early stage with the IMD’s prediction of an above normal monsoon this year,” the finance ministry’s monthly review said.

The decline in manufacturing has severely impacted smaller economies, hindering their ability to participate in global production, upgrade production methods and adopt new technologies.

A significant shift has taken place in the global economy with the growth of foreign direct investment (FDI) and global value chains (GVCs) no longer aligned with GDP and trade growth and even amidst rising trade tensions, global GDP and trade, since 2010, have continued to expand at an annual average of 3.4 per cent and 4.2 per cent respectively. In stark contrast, FDI growth has stagnated near zero per cent in the midst of rising protectionism, growing geopolitical tensions, and increased investor caution, says the latest UN Trade and Development (UNCTAD) report “Global economic fracturing and shifting investment patterns” launched on 23rd April.

The report examines the complex landscape of global FDI and sheds light on how over the past two decades, transformative shifts driven by technological advances, policy developments, and sustainability demands have reshaped globalization, compelling FDI patterns to adapt in three key aspects. It emphasizes the necessity of integrating sustainability and development into investment strategies and calls for innovative investment strategies to foster inclusive and sustainable economic growth.

Second, notes UNTAD, there is a widening gap in investment trends between manufacturing and services sectors with investments increasingly leaning towards services. From 2004 to 2023, the share of cross-border greenfield projects in the services sector grew from 66 per cent to 81 per cent, and services-related investment within manufacturing industries nearly doubled to about 70 per cent, driven by technological advances. Simultaneously, FDI in manufacturing was stagnating for two decades before going down significantly, with a negative compound annual growth rate of -12 per cent in the three years after the outbreak of the Covid-19 pandemic.

The decline in manufacturing has severely impacted smaller economies, hindering their ability to participate in global production, upgrade production methods, and adopt new technologies. On the other hand, expansion of the services sector mainly benefits larger developing economies that can effectively compete, creating an imbalance that leaves smaller ones at a disadvantage, accentuating disparities and underscoring the need for policies that provide all developing countries equal opportunities.

The decline severely hinders developing economies’ efforts to leverage participation in GVCs for economic development and industrial transformation.

The share of cross-border greenfield projects in the services sector rose from about 65% two decades ago to over 80%. And services-related investment within manufacturing industries nearly doubled to about 70%, driven by technological advances.

Meanwhile, FDI in manufacturing has seen a significant downturn, with a compound annual growth rate of -12% in the three years following the outbreak of the pandemic. The decline severely hinders developing economies’ efforts to leverage participation in GVCs for economic development and industrial transformation.

A key finding of the report is that investment patterns in China have delinked from the rest of the world with the geography of global FDI being significantly re-shaped by China’s reduced role as a recipient country, a process that accelerated after the outbreak of the COVID-19 pandemic. Over the past three years, the number of greenfield projects to China has hovered at a level around one third the same figure a decade ago. Multinational corporations have shown diminishing enthusiasm for launching new investments in China. However, China continues to play a dominant role in global manufacturing and trade, suggesting that its “global factory” mode has not downsized but instead transitioned from globally integrated production networks to more domestically focused ones.

The UNCTAD report flags concern over the transition from divergence to fracturing in global investment patterns amidst recent global conflicts and crises which have disrupted usual investment patterns, leading to unstable investment relationships and limited chances to benefit from strategic diversification. The report cautions that FDI decisions are now more frequently influenced by geopolitical factors, at times overriding economic determinants, complicating standard approaches to investment promotion and hindering FDI-based development.

Investments between geopolitically distant countries – those with divergent political interests or foreign policies – decreased from 23 pr cent in 2013 to 13 pr cent in 2022. This trend particularly affected the manufacturing sector as trade tensions began to escalate in 2019.

The transition from divergence to fracturing and sectoral shifts and geographic rebalancing of FDI offer potential benefits but these are likely to be available only to a small group of developing economies. Most others face declining manufacturing investment and a shrinking pool of efficiency-seeking, lower value-added projects to leverage for GVC participation. Heightened uncertainty and fracturing are eroding the predictable and open global investment environment upon which they rely to support their development objectives.

The other cause for worry, says UNCTAD, is that despite progress toward sustainability and the sustainable development goals (SDGs), impact on developing nations are mixed. The sustainability imperative and the drive to stimulate investment in the SDGs have opened new opportunities for investment-driven industrial development, particularly in environmental technologies. However, these new opportunities can only compensate in part for the lack of FDI growth in other industrial sectors.

The growing trend of FDI to environmental technologies offers new opportunities but fails to fully address the slowdown in other industries, specially affecting developing and least developed countries increasing the vulnerability of their economies. Investments in environmental technologies like wind and solar energy have surged. Their share of total greenfield projects in non-services sectors jumped from 1 per cent in the early 2000s to 20 per cent by 2023. Likewise, FDI in the manufacturing of electric vehicles and batteries has seen 27% annual growth over the past decade. However, this growth only partially offsets the decline in other manufacturing sectors. It also primarily benefits developed countries, while least developed countries (LDCs) continue to struggle with reduced FDI in traditional sectors.

Given the imperative to bridge investment disparities across sectors and regions, UNCTAD has called for immediate action to ensure that the benefits of investment are distributed more equitably and aligned with overarching developmental objectives. The key policy recommendations from UN Trade and Development underline the need for developing countries to revise their economic development strategies and calls on global policymakers, business leaders, and development agencies to enhance collaboration at global and regional levels and work towards a more open and fairer global investment environment.

In both cases, rates of expansion driven by increase in aggregate business activity resulted in the highest composite output index since June 2010 and the fastest in close to 14 years.

Indian private sector output expanded at a faster pace in April as economic growth across the sector continued to strengthen, buoyed by expansion in buoyant demand from domestic and external clients and a pick-up in sales growth. According to the HSBC Flash India PMI® data on Tuesday, positive demand trends fueled new business intakes and output, taking the headline HSBC Flash India Composite PMI Output Index – a seasonally adjusted index that measures the month-on-month change in the combined output of India’s manufacturing and service sectors – from 61.8 in March to 62.2 in April.

In both cases, rates of expansion driven by an increase in aggregate business activity resulted in the highest composite output index since June 2010 and the fastest in close to 14 years. The manufacturing industry led the latest upturn, as was the case in March, although softening growth at goods producers compared with accelerations at service providers. Sustained increases in new orders added pressure on the capacity of manufacturing firms and their services counterparts, which in turn underpinned recruitment. Jobs growth was notably stronger among the former.

The Reserve Bank of India had noted strong prospects of the manufacturing and services sectors as among factors in pushing the Central Bank for a vote to keep the policy repo rate unchanged at 6.50 per cent. Pranjul Bhandari, Chief India Economist at HSBC, notes that services growth accelerated further in April as new orders in both domestic and international markets rose. “Both composite input and output prices moderated in April, albeit remaining robust. Manufacturing margins improved in April as firms were able to pass on higher prices to customers due to strong demand conditions. In fact, manufacturing industries sharply increased their staffing levels and input buying activity,” says Bhandari, emphasizing improvement in overall future business outlook in April.

Growth in India remained broad-based across the manufacturing and service sectors. The former saw the sharper rate of increase, albeit one that was softer than in March. In the service economy, business activity rose to the greatest extent in three months. Private sector sales expanded for the 33rd successive month in April. In line with the recent trend, international sales positively contributed to total order books. In fact, at the composite level, new export orders rose at the fastest rate since the series started in September 2014. On this front, services companies noted the quicker rate of expansion. Anecdotal evidence pointed to stronger sales to clients in Africa, Asia, Australia, the Americas, Europe, and the Middle East.

Despite persistently robust increases in new business, pressures on capacity remained mild in April. Orders pending completion among private sector companies in India rose for the 28th month in a row, but at a slight pace that was weaker than that recorded in March. Manufacturers also substantially stepped up input buying, with growth climbing to a ten-month high. This supported a further increase in stocks of purchases, one that was the second-fastest since May 2023. Suppliers were reportedly able to accommodate for the upturn in buying levels, with delivery times improving to the greatest extent in ten months.

Yet, efforts to meet rising demand and clear backlogs supported further job creation at the start of the 2024/25 fiscal year. A slight increase in private sector employment masked notable divergences at the sector level. While service providers took on extra staff at a marginal pace that was softer than in March, goods producers raised workforces to the greatest extent in nearly a year-and-a-half.

The survey’s price measures showed slower rates of inflation for both aggregate input costs and output charges. Input cost inflation receded at both manufacturing companies and their services counterparts, with the latter noting the faster rise. Anecdotal evidence suggested that labour costs were the main factor behind rising expenses at service providers. At the composite level, the rate of increase was below its long-run average. Although prices charged for Indian goods and services rose to a lesser extent in April, the rate of inflation remained above its long-run average. According to survey participants, demand strength facilitated the passing on of rising expenses to clients. A stronger increase in the manufacturing industry contrasted with a slowdown at services firms.

Finally, the latest results showed a pick-up in business confidence during April. The composite Future Output Index rose from March’s four-month low and was above the series average (since April 2012). Panelists expect further improvements in demand and productivity over the course of the coming 12 months.

India’s economy has showcased remarkable resilience and growth amidst global challenges, with GDP estimates revised upwards to 7.6% for the fiscal year, according to Ajay Seth, India’s Economic Affairs Secretary.

Speaking at a World Bank committee meeting, Seth highlighted India’s consistent performance, with growth exceeding 8% for three consecutive quarters of FY24. Seth emphasized that India’s proactive reforms and investments in sustainable growth avenues have positioned it as a standout performer amid sluggish global growth trends. Various agencies have revised India’s fiscal 24 growth estimate closer to 8%, reflecting confidence in the country’s economic trajectory.

Despite Finance Minister Nirmala Sitharaman’s absence from the annual Spring Meeting of the IMF and the World Bank due to ongoing elections, India’s official representation at the meeting underscores its commitment to global financial cooperation.

Seth noted India’s continued focus on capital expenditure, which has spurred private investment and led to enhanced Gross Fixed Capital Formation (GFCF) growth of over 10% in FY24. He also highlighted positive trends in inflation outlook and external trade balance, indicating favorable economic conditions.

In a significant move to catalyze AI innovation, the Indian government has approved the India AI Mission with a budget outlay of INR 103 billion. This initiative aims to build a robust AI ecosystem through infrastructure development, indigenous capabilities, talent attraction, and startup financing, positioning India as a leader in technological innovation.

Seth also highlighted the manufacturing sector’s double-digit growth in Q3 of fiscal year 24, driven by increased investment, improved investor confidence, and strong domestic demand. He underscored India’s dominance in digital transactions, with a share of 46% of global real-time transactions in 2022, reflecting the country’s digital transformation and inclusive economic growth.

The volume of UPI online transactions witnessed a significant YoY growth in Q3 FY24, driven by convenience, security, and increased financial flexibility. Seth emphasized the transformative impact of mobile connectivity and digital banking on inclusive growth, benefiting consumers, traders, vendors, and vulnerable populations.

India’s vibrant capital market, supported by a robust investment climate and transparent trading system, has remained among the best performing in emerging markets. Seth highlighted the surge in dematerialization (DEMAT) accounts, reflecting investor confidence and technological advancements in the equity market.

Overall, Seth’s remarks underscore India’s economic resilience, proactive reforms, and commitment to leveraging technology for inclusive growth and global competitiveness. The country’s sustained growth trajectory and favorable economic indicators position it as a key player in the global economic landscape.

Seth’s address to the Development Committee highlights India’s steadfast commitment to economic growth and technological advancement. With a positive outlook on inflation, trade balance, and capital market performance, India continues to attract investor confidence and drive sustainable development. The India AI Mission underscores the government’s vision to harness emerging technologies for inclusive growth and global leadership. As the nation navigates through global uncertainties, its resilient economy and strategic initiatives pave the way for a brighter future. India’s role as a beacon of growth and innovation in the global arena remains steadfast, promising continued prosperity and progress.