Subdued net exports have prevented real GDP growth from crossing pre-pandemic trend trajectory: FinMin

Noting that the higher annual growth in FY23 was driven mainly by better-than-expected growth in the January-March quarter, the ministry, however, said that consumption and investment demand have surpassed pre-pandemic trend trajectory.

“Enabled by the release of pent-up demand, real Private Final Consumption Expenditure (PFCE) has surpassed the pre-pandemic trend trajectory. Similarly, a large step-up in public sector capex over the last three years and a favourable credit situation in the country have contributed to real Gross Fixed Capital Formation (GFCF), also surpassing the pre-pandemic trend trajectory,” it said.

“However, the faster growth in post-pandemic economic activity in the Indian economy and high import prices have kept the import demand elevated. As a result, the negative net exports in real terms have shown a sharp post-pandemic downward trend trajectory as compared to a slightly upward pre-pandemic trend trajectory. This has prevented the post-pandemic real GDP trend line from crossing the pre-pandemic trend trajectory, although it is very near to doing so. Given the decline in prices of India’s import basket and a sustained surge in service exports, the net exports gap is expected to become smaller sooner than earlier expected. This will enable real GDP to surpass its pre-pandemic trend trajectory in the near future,” the report added.

India’s GDP had clocked a higher-than-expected growth rate of 6.1 per cent in January-March 2023, in turn pushing up the growth estimate for 2022-23 to 7.2 per cent, according to data released by the National Statistical Office (NSO) on May 31.

Outlook for external sector

The ministry outlined the European Union’s (EU) introduction of the Carbon Border Adjustment Mechanism (CBAM), for which reporting of carbon content in exports to the EU would be required to begin from October 1, 2023, as one of the impending downside risks to India’s exports.

Also, continued uncertainty about the Russia-Ukraine conflict and polarisation risks arising out of the prevailing geopolitical situation reflect in the possible adoption of trade-restrictive measures. In addition, foreign direct investment flows may also be impacted by political distance more than geographical distance, the report said, citing International Monetary Fund (IMF) research. The current account deficit is sustainable if it is financed by normal capital inflows, it said.

India needs to watch FDI data closely and take measures to facilitate inflows after recording a decline in net FDI by 27.4 per cent in FY23. Measures would also be required to facilitate large capacity creation, last-mile infrastructure issues and labour availability, the ministry said.

“FDI flows to India bore the brunt of inflationary pressures and tighter monetary policy abroad. While Gross FDI, which reached a record high of US$ 84.8 billion in FY22, moderated in FY23 by 16 per cent on a YoY [year over year] basis, net FDI declined by 27.4 per cent in FY23 on a YoY basis. However, this phenomenon is not unique to India, as net FDI inflows to EMEs [emerging market economies] declined by 36 per cent in 2022, as per OECD [Organisation for Economic Co-operation and Development] statistics,” it said.

“Also, geopolitics has dominated geography, with investors “friend shoring” the FDI by increasing investments in countries which are geopolitically aligned to each other, thereby leading to fragmentation in FDI flows across the globe indicated in IMF’s World Economic Outlook (April 2023). Hence, India needs to watch FDI data closely and continue to take measures to facilitate FDI inflows. Last-mile infrastructure issues, labour availability and measures to facilitate large capacity creation will be needed. This policy space may need India’s increasing attention in the coming months and years,” it added.

Growth outlook for FY24

High-frequency indicators indicate a healthy picture of the state of the economy, the ministry said, adding that urban demand conditions remain resilient, with higher growth in auto sales, fuel consumption and UPI transactions. Rural demand is also on its path to recovery with robust growth in two- and three-wheeler sales, it said. The review also said that despite unprecedented global challenges in the last few years coming on top of balance sheet troubles in Indian banking and non-financial corporate sectors, macroeconomic management has been stellar.

However, enhanced volatility in global financial systems, sharp price correction in global stock markets, high magnitude of El-Nino impact, and modest trade activity and FDI inflows owing to frail global demand are factors that can constrain the pace of growth, the ministry said. “Should these developments deepen and dampen growth in the subsequent quarters, the external sector may challenge India’s growth outlook for FY24,” it said.