CHAPTER-1: STATE OF THE ECONOMY: STEADY AS SHE GOES

Economy Survey 2023-2024: Revision Notes

Introduction

India’s Economic Response to the Pandemic

Key Components

• Infrastructure Spending:
  • Government investment in infrastructure created jobs and boosted industrial output.
  • Triggered private investment.
  • Strong financial health of public and private sectors facilitated this.
• Digitalization:
  • Accelerated by the pandemic as a business necessity.
  • Government support and policy framework crucial for success.
  • Irreversible and transformative change.
• Atmanirbhar Bharat Abhiyan:
  • Targeted relief for sectors and people.
  • Structural reforms for strong recovery and growth.

Economic Outcomes

• GDP Growth:
  • 20% increase in real GDP compared to FY20.
  • Resilient growth amidst global challenges.
  • Positive outlook for FY25 and beyond.
• Inflation Management:
  • Controlled through administrative and monetary policies.
  • Improved fiscal balance due to tax compliance, expenditure control, and digitization.
• External Balance:
  • Pressured by global demand slowdown but offset by strong service exports.
• Inclusive Growth:
  • Reduced unemployment and poverty.
  • Increased labor force participation.

Basic

1. Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. It’s considered a broad measure of a country’s overall economic activity. GDP can be calculated in three different ways, all of which should yield the same result: the expenditure approach, the income approach, and the production approach. Each method focuses on a different aspect of economic activity but ultimately measures the same thing: the total value of the economy’s output.

2.GDP Growth measures the rate at which a country’s economy expands over time. It represents the percentage increase in the total value of goods and services produced within a specific period, usually a year. A higher GDP growth rate indicates a thriving economy with increased production, job creation, and rising incomes. Conversely, a lower or negative growth rate signifies economic contraction. Factors influencing GDP growth include consumer spending, business investment, government spending, and net exports.

2.Real GDP is a measure of a country’s economic output adjusted for inflation. It provides a more accurate picture of economic growth by removing price changes from the equation. Unlike nominal GDP, which reflects current prices, real GDP uses constant prices from a base year. This allows economists to analyze changes in production volume without being distorted by inflation or deflation. Essentially, real GDP shows how much an economy has actually grown in terms of goods and services produced.

Global Economic Scenario

Overview of 2023

• The global economy showed increased stability in 2023 despite ongoing geopolitical uncertainties.
• Global growth reached 3.2%, slightly lower than 2022 but higher than projected.
• Inflation remained high, global trade slowed, and foreign direct investment decreased.

Performance of Emerging and Developed Economies

• Both emerging and developed economies grew faster than anticipated.
• India and China achieved 20% higher GDP compared to 2019.
• The US maintained growth, while the Eurozone experienced a slowdown.
• Economic performance varied widely due to structural issues, geopolitical conflicts, and monetary policies.
• India recovered rapidly, while China’s growth slowed.
• Japan is expected to rebound in 2024.

Other Economic Indicators

• Leading indicators suggest improving global economic activity.
• The JP Morgan Global Composite PMI has increased.

Supply Chain and Inflation

• The Red Sea crisis temporarily disrupted supply chains in October 2023.
• Inflation has decreased from its 2022 peak but remains above target in many countries.
• Goods prices fell, but service prices continued to rise.

Monetary Policy

• Persistent core inflation led to continued rate hikes by many central banks in 2023 except China.
• Hints of rate hike cycle peaking in recent policy meetings.
• ECB became the first major central bank to cut rates in June 2024.
• Fed projected lower rate cuts in June 2024 compared to March 2023.
• Strong labor market and inflation pressures hinder Fed’s rate cuts.
• Market expectations of earlier and deeper rate cuts reflected in yield curve inversion.
• Easier financial conditions partially offset Fed’s tightening.

Fiscal Policy

• Global general government fiscal deficit increased by 1.6% of GDP in 2023.
• Decline in revenue due to waning windfall profits in oil and commodity sectors.
• Global public debt also increased.

Global Trade

• Global exports grew modestly by 0.5% in 2023.
• Lower demand in developed economies and weaker trade in East Asia and Latin America impacted growth.
• High energy prices and inflation reduced demand for manufactured goods.
• Services trade partially offset decline in goods trade.
• Supply chain disruptions and increased trade restrictions contributed to slowdown.
• Geopolitical trade realignment with rising trade restrictions.

Foreign Direct Investment (FDI)

• Global FDI flows declined in 2023.
• Concerns over geopolitical conflicts, high borrowing costs, and global economic fragmentation impacted FDI.

Basic

1.Monetary Policy is the process by which the monetary authority of a country, typically the central bank, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general economic health. Tools used in monetary policy include open market operations, reserve requirements, and interest rate targeting.

2.Fiscal Policy is the use of government spending and taxation by a government to influence the economy. When the government decides on the level of taxes and spending, it is engaging in fiscal policy. This policy is often used to stimulate economic growth, reduce unemployment, and stabilize prices.

A RESILIENT DOMESTIC ECONOMY

Overall Economic Growth

• India’s real GDP grew by 8.2% in FY24, marking the third consecutive year of over 7% growth.
• GVA grew by 7.2% with broad-based expansion.
• Net taxes grew by 19.1% due to strong tax collection and subsidy rationalization.

Sectoral Performance

• Agriculture grew at a slower pace due to erratic weather.
• Manufacturing grew by 9.9% driven by reduced input costs and stable demand.
• Construction grew by 9.9% due to infrastructure push and real estate demand.
• Services sector grew strongly, driven by financial and professional services, and recovering contact-intensive services.

Demand Side

• Private consumption grew by 4% with strong urban demand and recovering rural consumption.
• Gross Fixed Capital Formation (GFCF) continued to drive growth, with private capex showing momentum.

Basic

1.Gross Fixed Capital Formation (GFCF) is essentially a measure of investment in an economy. It represents the value of additions made to a country’s fixed assets during a specific period. These assets include machinery, buildings, and other structures used for production. GFCF is a crucial component of GDP as it signifies the portion of output reinvested to enhance future production capacity. A high GFCF indicates a robust economy with potential for sustained growth.

Key Indicators

• GST collections and e-way bill issuance showed double-digit growth.
• Passenger vehicle sales and air passenger traffic increased.
• HSBC India PMI for manufacturing remained above 50, indicating expansion.

Household and Corporate Investment

• Households increased investment in housing, with sales reaching a 10-year high in 2023.
• Banking sector well-positioned to finance investment demand.
• Credit growth to MSMEs and services remained strong.
• Personal loans for housing surged.
• Corporate bond issuances increased by 70.5% in FY24.

External Sector

• Global trade growth slowed in 2023, impacting merchandise exports.
• Services trade surplus offset decline in merchandise exports.
• Domestic demand replaced external demand as growth driver.
• GDP reached pre-pandemic projected levels.

Permanent Output Loss

Concept

• Downward shift in observed variable due to loss in output capacity.
• Analysis focuses on GDP, GVA, PFCE, GFCF, industrial GVA, and services GVA.
• Data deseasonalized using X-12 ARIMA technique.
• Trend line plotted between June 2011 and March 2020, extended to March 2024.

Findings

• GDP, GVA, private consumption, GFCF, and industrial GVA recovered quickly post-pandemic.
• CQGR higher in Q3 FY21 – Q4 FY24 compared to pre-pandemic period.
• Avoided permanent losses in demand/output.
• Factors contributing to recovery: counter-cyclical fiscal policy, process reforms, digital infrastructure, GST, IBC.
• Services GVA yet to reach pre-pandemic trend level due to trade, hotel, road, and air transport sectors.
• GDP only 1% below pre-pandemic trend in FY24.
• Existing growth momentum allows for catching up and surpassing pre-pandemic trend.

Analysis

• India’s economy demonstrated resilience in recovering from the pandemic.
• Strong growth momentum positions the country for continued economic expansion.
• Focus on addressing challenges in the services sector is crucial for complete recovery.

Basic:

1.GDP vs GVA

Feature	GDP	GVA
Definition	Total monetary value of all final goods and services produced within a country’s borders in a specific period	Value added to a product at each stage of production
Scope	Includes all economic activities within a country	Focuses on the contribution of individual sectors to the economy
Calculation	Sum of consumption, investment, government spending, and net exports	GDP minus taxes plus subsidies
Usefulness	For comparing economies and measuring overall economic growth	For analyzing sectoral performance and understanding regional disparities
Relationship	GVA is a component of GDP	GDP is derived from GVA by adding taxes and subtracting subsidies

 

MACROECONOMIC STABILITY SAFEGUARDS GROWTH

FY23 Challenges

• Global Spillovers: Conflict in Europe led to increased oil prices, stoking domestic inflation and widening CAD.
• Global Monetary Tightening: Central banks raised rates to combat inflation, creating uncertainty in advanced and emerging economies.

India’s Focus: Macroeconomic Stability

• FY23 & FY24: Prioritized macroeconomic stability to secure growth amid domestic and external challenges.

Fiscal Consolidation

• Contrasting Global Trend: India reduced fiscal deficit while others increased it.
• FY23-24: Fiscal deficit reduced from 6.4% to 5.6% of GDP.
• Revenue Growth: Strong direct and indirect tax growth due to economic resilience and increased compliance.
• Non-Tax Revenue: Higher-than-budgeted dividends from RBI boosted revenue.
• Capital Outlay: Increased share of fiscal deficit allocated to capital expenditure, improving resource productivity.

Revenue Buoyancy in FY24

• Revenue Growth:5% YoY growth in tax and non-tax revenue.
• Gross Tax Revenue (GTR):4% growth, tax buoyancy of 1.4.
• Direct Taxes:8% growth, contributing 55% of GTR.
• Indirect Taxes:6% growth, driven by 12.7% GST growth.
• GST Compliance: Increased GST collection and E-way bill generation indicate improved compliance.

GST and NMP

• GST Maturity: Streamlined procedures enhanced tax buoyancy for central and state governments.
• GST Reforms: Calls for rate rationalization, base expansion, and improved compliance.
• National Monetisation Pipeline (NMP): Gaining traction with ₹9 lakh crore receipts in FY22-24.
• NMP Impact: Improves capital allocation and aids fiscal consolidation.

Trends in Central Government Expenditure

Fiscal Consolidation and Social Spending

• Government focused on fiscal consolidation while protecting vulnerable sections.
• Revenue expenditure reduced as a percentage of GDP.
• Free food grains provided to 81.4 crore people.
• Increased share of total expenditure allocated to capital spending.

Capital Expenditure (Capex)

• Capex increased by 28.2% YoY in FY24, reaching ₹5 lakh crore.
• Capex focused on roads, railways, defense, and telecommunications.
• Crowding-in of private investment observed.
• Grants-in-aid to states for capital asset creation incentivized.

Private Sector Role

• Government aims to facilitate infrastructure development.
• Private sector expected to drive capital formation.
• Share of private non-financial corporations in overall GFCF increased marginally.
• Focus on increasing share in machinery and equipment capital stock.
• Strong balance sheets and bottom lines crucial for private sector investment.

Revenue Expenditure

• Total expenditure lower than budgeted estimates in FY24.
• No compromise on rural development and education spending.
• Efficient expenditure management led to lower interest payments.
• Interest payments still constitute 30.4% of revenue expenditure.
• Commitment to fiscal consolidation and asset monetization essential to reduce interest payments.
• Expenditure on major subsidies declined due to lower fertiliser prices.

State Government Finances

• Improved state finances in FY24.
• Gross fiscal deficit lower than budgeted.
• Focus on capital expenditure by state governments.
• Union Government transfers progressive, benefiting poorer states.
• Richer states mobilize higher tax revenue.

General Government Debt

• Fiscal consolidation led to declining debt trajectory till FY23.
• Debt to GDP ratio increased slightly in FY24 due to higher interest rates and lower nominal GDP growth.
• Low currency and interest rate risks in Union Government debt.
• Gradual elongation of maturity profile of Union Government debt.
• S&P Global Ratings upgraded India’s sovereign credit rating outlook to ‘positive’.
• Continued fiscal consolidation required to achieve higher rating.
• Lower benchmark borrowing cost expected with improved rating.

Moderation in Inflation Pressure

• Retail inflation declined to 5.4% in FY24 from 6.7% in FY23.
• Government measures: open market sales, retailing in specified outlets, timely imports, reduced LPG prices, and cut in petrol and diesel prices.
• RBI measures: 250 bps rate hike, liquidity management, and communication.
• Headline CPI inflation at 5.1% and core inflation at 3.1% in June 2024.
• India achieved high growth and low inflation in FY22-FY24.

Financial System Resilience

• RBI’s vigil and regulatory actions ensured system’s resilience.
• Gross NPAs declined to 2.8% in March 2024.
• CRAR remained above regulatory threshold despite marginal decline.
• SCBs profitability steady with ROE and ROA at 13.8% and 1.3% respectively.
• Macro stress tests show SCBs can comply with capital requirements under stress.
• RBI tightened norms for unsecured lending to maintain financial stability.
• Risk weights increased for consumer credit and credit card loans.
• Sound banking system facilitates financing and lengthens financial cycle.

India’s External Sector

Trade and Current Account

• Merchandise exports moderated due to weak global demand.
• Merchandise imports declined due to lower commodity prices.
• Services exports reached a new high of USD 341.1 billion.
• CAD improved to 0.7% of GDP from 2.0% in FY23.
• Net private transfers grew to USD 106.6 billion.

Capital Account

• Robust FPI inflows of USD 44.1 billion in FY24.
• FDI inflows moderated to USD 26.5 billion due to global trends.
• Forex reserves at USD 11 months of imports and over 100% of total external debt.
• Indian Rupee remained stable among emerging market peers.

Macroeconomic Vulnerability

• Fiscal consolidation and prudent fiscal management continued.
• Fiscal deficit target of 4.5% of GDP or lower by FY26.
• Stable sovereign bond yields and spreads.
• Downward trajectory of macroeconomic vulnerability index.

Strengthening the Statistical System

Importance of Statistics

• Sound statistical system essential for informed citizenry and policymaking.
• MoSPI as nodal ministry for statistical development.
• Initiated new surveys: annual survey of unincorporated sector enterprises, time-use survey, and pilot for annual survey of service sector enterprises.
• Increasing frequency of PLFS data and quarterly estimates for rural areas.
• Adoption of modern IT tools for data capturing and processing.
• Development of National Metadata Structure.
• Unified Data Portal project for centralized database and storage.
• Ministries enhancing survey frequency for informed policy decisions.

Strengthening Statistical Database

• Base revision for important economic statistics.
• Change in base year of CPI from 2012 to 2024.
• Advisory Committee on National Accounts Statistics for GDP base year decision.
• Expediting construction of producer price index for goods and services.
• State-level variants of indices like IIP.
• Survey data on private sector capital formation.
• Linking high-frequency price monitoring data for essential food items.
• Utilizing granular GST data for business analysis, loan applications, and understanding regional economies.
• CAG establishing common fiscal data standards for public web portal.
• Regular indicators of production and employment in MSMEs.
• Industry-wise gross disbursement of bank credit data.
• Industry-wise monthly gross financial flows data.
• Regular mechanism to aggregate financial flows to infrastructure.
• Utilizing data from Pradhan Mantri Jan Arogya Yojana and Ayushman Bharat Digital Mission for disease surveillance.
• Ensuring rigour, timeliness, and user-friendliness of Labour Bureau data.
• Nurturing process and impact evaluation capacities in Union and State Governments and universities.

Analysis

• Strengthening statistical system crucial for informed decision-making.
• MoSPI and other agencies taking steps to improve data quality and availability.
• Utilization of data for policy formulation and implementation essential.
• Focus on evidence-based policymaking for effective governance.

INCLUSIVE GROWTH

Shift in the Approach to Welfare

Outcome-Based Empowerment

• Shift from input-based to outcome-based welfare approach.
• Focus on basic necessities for empowerment.
• Flagship initiatives: PM Ujjwala Yojana, Swachh Bharat Mission, Jan Dhan Yojana, PM-AWAS Yojana.
• Targeted implementation of reforms for last-mile service delivery.
• Aspirational Districts Programme, Aspirational Blocks Programme, Vibrant Villages Programme, Viksit Bharat Sankalp Yatra.
• Digitization for improved service delivery and efficiency.
• DBT scheme and Jan Dhan Yojana-Aadhaar-Mobile trinity for fiscal efficiency and leakage minimization.

Employment and Poverty Reduction

• Decline in unemployment rate since pandemic.
• Rise in labour force participation rate and worker-to-population ratio.
• Increase in female labour force participation rate.
• Remarkable reduction in multidimensional poverty.
• Rise in consumption spending as per HCES 2022-23.
• Increase in MPCE in both rural and urban areas.

Outlook

Global Economic Scenario

• IMF projects global growth of 3.2% in 2024.
• Inflationary pressures moderating but core inflation sticky.
• Central banks hinting at rate hike cycle peaking.
• ECB cuts policy rate, Fed hints at rate reduction.
• Potential for earlier monetary policy easing if services inflation moderates.
• Geopolitical conflicts, commodity prices, and capital flows as risks.
• Global trade outlook positive with potential for fragmentation.
• Financial market valuations elevated with potential for corrections.
• IT sector hiring slowed down.

Domestic Economic Outlook

• India’s real GDP grew 20% higher than pre-COVID levels in FY24.
• Strong investment demand supported by improved balance sheets.
• Caution on private capital formation due to fears of cheaper imports.
• Merchandise exports likely to increase with improving global growth.
• Services exports expected to witness further uptick.
• Normal monsoon forecast to support agriculture sector and rural demand.
• GST and IBC delivering envisaged results.
• Real GDP growth projected at 6.5-7% with balanced risks.

Conclusion

• India’s economic growth on a strong footing.
• Global factors to monitor for potential impact.
• Balanced approach to fiscal and monetary policies crucial.
• Focus on structural reforms for sustained growth.

 

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