India’s economy is thriving despite the difficult economic environment across the globe. According to a recent Bloomberg survey, there is very little likelihood that India would experience a recession in 2023. However, the likelihood of a recession in nations like the US and the UK is higher, with probability ranging from 50% to 75%. Meanwhile, Germany has already slipped into recession with 2 consecutive quarters of negative economic growth. This indicates that India’s economy is performing remarkably well compared to other nations, demonstrating its strength and adaptability on the international stage.
Let us take a look at the positive and challenging factors that have contributed to the positive outlook of the Indian economy:
Strong domestic demand:
Strong domestic demand supported by a young and expanding population, powers India’s economy. The US, Germany, and the UK economies, in contrast, rely heavily on exports, which have been hurt by the global slump.
Consumer spending accounts for over 60% of total spending in India, making it the largest component of GDP. Increased consumer spending contributes to economic growth.
India will benefit from its demographic dividend as a result of its sizable working-age population (15 years – 64 years). India’s young and expanding population boosts its economy, in contrast other developed nations that are dealing with ageing populations and shrinking workforces. This stimulates economic growth by boosting consumer demand for products and services, raising incomes to reduce poverty, and enhancing healthcare and education. India’s favourable demographics provide it a significant edge over other developed countries, even though they do not protect against recessions, and this fosters a positive economic perspective.
India would continue to be the world’s largest provider of human resources. India will account for around 24.3% of the incremental global workforce over the next decade. Currently India has a working age population of 67%, which higher than that of US and Europe.
Image Source: EY
Resilient Financial System
The Indian financial system is relatively shock resistant. This is due to a variety of factors, including high capital buffers and low non-performing loans. In comparison, the financial systems of the United States, Germany, and the United Kingdom are more vulnerable to shocks.
The banking system in India has a capital adequacy ratio of 13.3%, which is significantly higher than the regulatory requirement of 9%.
India has fiscal flexibility, which means that it can spend more to stimulate the economy if needed. A higher budget deficit enables the government to spend more on public investments, social welfare initiatives, and infrastructure development, which can stimulate the economy and increase growth.
However, a higher fiscal deficit can also result in an increase in public debt. Higher interest payments may follow, squeezing out investment and potentially contributing to financial instability.
If you look at the below graphs, you can notice that India has not been reducing its fiscal deficit as aggressive as Germany or the US. This in a way contributes to better economic growth.
Data Source: Trading Economics
Higher base line GDP Growth
Recession is defined as 2 consecutive quarters of negative economic growth. Countries like Germany has a base line GDP growth rate in the range of 2-3% and hence their growth is more prone to slip into the negative range.
But India has a baseline growth rate in the range of 4-7%. So, a negative growth rate is mostly not possible for an emerging market like India. Even if GDP contracts, it will most likely remain in the positive range.
Inflation Basket Mismatch
Real GDP = Nominal GDP – Inflation
CPI is the most popular metric used by countries to indicate the level of inflation in their respective countries. After the onset of the Russia-Ukraine war, inflation spiked in various countries. Germany witnessed an inflation of 9% which is 4.5 times more than its baseline inflation levels.
India also saw an increase in inflation. However, India’s inflation remained constant with respect to its baseline inflation. This is mainly because of the mismatch of the basket of components used for calculating CPI in various countries.
In the below graphs we can see that in India’s CPI, Housing only accounts for 10%, whereas in the US, it accounts for 36%. This mismatch maybe one of the reasons why India’s inflation did not show huge increase when compared to countries like the US or Germany.
So lower inflation results in higher real GDP, in paper at least.
Data source: RBI, BLS
In conclusion, despite global economic challenges, India’s economy has performed well in comparison to other countries. A young population’s robust domestic demand, a stable banking system, and budgetary flexibility have all contributed to India’s upbeat outlook. Despite limitations about the method by which inflation is computed, India’s favourable demographics and economic resiliency point to a promising future for continued growth.
Author: Kevin Jose
Title Image Source: IBEF