On December 6, 2022, the World Bank revised its GDP growth outlook for India for 2022-23 from 6.5% to 6.9%, on the back of the economy’s strong performance in Q2. The World Bank went on to say that the nation was “well placed” to weather any potential global windfall in 2023.
The Indian economy has proven to be remarkably resilient in the face of deteriorating global conditions due to its strong macroeconomic fundamentals that place it well ahead of other emerging market economies.
Here’s a look at how the economy fared through 2022, where India is positioned for growth in 2023.
2022 – The Year of Review
There was no shortage of headwinds throughout the year, affecting India’s path to economic recovery. The year began with the threat of the Omicron variant of the coronavirus. Fortunately, the threat subsided fairly quickly, without affecting the economy in any significant way. The only problem was that this headwind was replaced by Russia’s invasion of Ukraine in mid-February, leading to more disruption in the global supply chain.
The next development that impacted the economy was the decision by several major central banks, especially the US Federal Reserve, to reverse their loose monetary policy stance. The ripple effect of the tighter policy measures was felt worldwide. The RBI was not far behind in tightening its stance either, with the first interest rate hike announced in May.
Some of the key aspects of the economy that deserve special mention are:
The Indian GDP
In the first half of the current financial year, India’s GDP registered a growth of 9.7%, compared to 13.7% a year ago. Gross Value Added (GVA) also rose, although below the level seen in the same period last year, at 9% against the growth of 12.8% a year ago. GDP growth accelerated at the end of June although lower than the RBI’s expectations, rising to 13.5%. This growth was driven by an increase in gross fixed capital formation and private consumption expenditure.
Some normalization was seen in the end of September, with GDP growth slowing to 6.3%, driven by the contraction of the mining and manufacturing sectors, together with high inflation, declining exports and rising input prices.
Retail inflation, as reflected in the Consumer Price Index, remained above the RBI’s upper tolerability level of 6% for 10 consecutive months till November, when it eased slightly to 5.88%. Retail inflation hit an eight-year high in April, with rural inflation rising to 8.4% and urban inflation to 7.1%.
Analysts attributed the surge to the sharp rise in food inflation, which hit a 17-month high of 8.4% in April. This increase was driven to a large extent by the worldwide spike in crude oil prices, which affected not only food and commodity prices, but also communication and transportation costs.
Increase interest rates
Although the Monetary Policy Committee (MPC) of the RBI left the rate unchanged at 4% in April, it voted unanimously to raise the repo rate during its off-cycle meeting in May. As a result, the repo rate rose 40 basis points to 4.40%. The MPC has raised rates at each of the three subsequent meetings this year, hiking the repo rate by 50 basis points each time, until the rate peaked at 5.9% in September.
It was only recently in December that the RBI decided to moderate its rate hike, raising the repo rate by 35 basis points to 6.25%.
The Indian stock market
It has been an action packed year for the Indian stock market. The first blow came from the Russia-Ukraine war, which sent the Sensex plunging 2,702 points on February 24, the day Russia invaded Ukraine. But both Sensex and Nifty rebounded fairly quickly, driven by a better-than-expected corporate earnings season in Q1, along with moderation in global commodity prices and domestic inflation.
Investor sentiment also received a boost from the return of FIIs in the Indian market, sending the Sensex and Nifty to new highs. With rapid geopolitical and economic developments worldwide, the Sensex has seen over 1,000 rallies, with its biggest single-day gain coming on February 15, when it surged 1,736 points. On the upside, the Sensex has also seen major crashes, with the index plunging at least 1,000 points in a single day at least 14 times in the year.
Nifty, India’s economic bellwether, also remained volatile during the year, recording a gain of nearly 3%. While the big winners during the Covid era, pharma and IT, did not fare well in 2022, the financial sector proved to be a familiar one, with the Nifty Bank index rising to almost 18% at the end of December, driven by rising interest rates. , recovery in credit demand and a steep decline in non-performing assets.
Look ahead to 2023
The new year brings hope for continued momentum in India’s growth story, supported by the sustained strength of domestic demand, according to a recent Morgan Stanley report. Furthermore, the OECD is optimistic that India could become the second fastest growing economy among the G20 nations in FY2022-23, after Saudi Arabia. This is expected despite a potential slowdown in global demand, inflationary pressure and continued tightening of monetary policy.
Credit Suisse’s Global Equities Strategy team has also upgraded India from “Underweight” to “Benchmark” for 2023, due to the nation’s underlying economic strength. In terms of investments, the sectors expected to perform best include financial services, banking, insurance, capital goods, housing, defense, infrastructure and railways.
And investment decisions cannot be based on hope. It is important to continue to do your due diligence to make well-informed investments.