India's economy appears to have continued its solid, albeit gradually slowing, growth dynamic into 4Q22, supported by domestic demand and sector-wise by the services sector and agriculture. While robust, the growth is still below pre-pandemic levels. As in other economies, a shift from manufacturing to the services sector is becoming increasingly apparent. The latest budget proposal for the fiscal year of 2023/2024 provided expectations of sound support for 2023 growth, and to some extent helps compensate for an expected slow-down in various areas of the economy.
Moreover, the budget targets a fiscal consolidation of 0.5% of GDP. This will also be achieved via major subsidy savings that are expected in the next fiscal year, including cutting back subsidies for the free grain program and providing lower fertilizer subsidies, considering the recent drop in global fertilizer prices. This will lead to fiscal savings of around 0.8% of GDP.
While India's economic growth performance is be better-than-expected some months ago, the overall dynamic is still expected to slow in 2023. This expectation is due to a global slowdown impacting exports, as well as monetary policy normalization, among other factors, that are forecast to slow the 2023 growth dynamic relative to 2022. In addition, the considerable recovery post-pandemic supported by private consumption and investment growth will taper off due to generally high inflation, less accommodative monetary conditions and a weakening strong base effect compared to 2022.
Household consumption is expected to continue to grow, primarily supported by pent-up demand for high-contact activities, but this is likely at a lower rate. With most of the current and foreseeable growth dynamic already built into expectations, India's 2022 and 2023 GDP growth forecasts remain unchanged at 6.8% and 5.6%, respectively.
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