It has been a tumultuous past couple of weeks for the Indian capital markets, with questions being asked of the robustness and effectiveness of its institutions and their regulatory oversight. India also released its much-anticipated annual budget at the start of the month. We speak with Priyanka Kishore, economic and forum director at IMA Asia, about the budget and its implications on different sectors, and delve into the long-term ramifications of the Hindenburg-Adani saga on the prospects of the Adani Group.
Unravel: What are the prospects for the Indian economy in 2023?
Priyanka Kishore: A slowdown is on the cards in 2023. The economy was boosted by robust domestic demand and strong export growth in 2022. This likely resulted in full year GDP growth of 6.9%. But it was a year of two halves. Growth started decelerating in the third quarter, due to weak manufacturing performance, and is likely to have slowed further to 4.5% in the last quarter of 2022. With domestic lending rates beginning to creep up in response to the RBI’s 250 basis point rate hike and exports poised to decline amid slowing global demand, GDP growth is likely to drop quite below 6% in 2023. IMA’s forecast is 5.4%.
Unravel: Have accusations of fraudulent practices against the Adani group by Hindenburg Research dented the outlook further?
Ms Kishore: From India Inc’s perspective, the Adani development focuses investors’ attention on two issues – the health of company balance sheets and corporate governance. At an aggregate level, corporate debt, which is only around 55% of GDP, hasn’t really been a worry for India. Indebtedness of firms in certain sectors, such as infrastructure, has been a cause of concern. But in recent years, there has been a focused effort to deleverage and strengthen balance sheets. Corporate governance is a firm specific issue and hardly specific to India. In general, long-term India and emerging market investors have the toolkit to assess the degree of risks in such areas and shouldn’t be deterred by single firm developments. Though, they will likely turn more vigilant now.
Then there are the broader economic concerns, in particular about the government’s infrastructure drive. Capital expenditure has grown at an average pace of more than 30% in the last three years and the plan for the coming year is to stay on that course. It is possible that the actual spending may fall short of target in FY24 if one of India’s largest infrastructure conglomerate decides to slow down its spending plans. But it’s unlikely to be a large shortfall as other firms will likely step in to narrow the gap. Encouragingly, the exposure of the domestic financial system to the group is low and there are no obvious system risks visible yet.
Unravel: In your view, will the FY24 budget be able to support economic recovery and employment growth in the country?
Ms Kishore: The FY24 budget followed a similar blueprint as the previous ones under the NDA government. To her credit, Finance Minister Nirmala Sitharaman refrained from announcing populist spending ahead of the general elections in 2024. The focus remains very much on infrastructure spending, with a target of INR10 trillion, a whopping 37.4% increase over FY23. But to achieve fiscal consolidation and stay on the right side of rating agencies, the government proposes to trim revenue expenditure by lowering the planned subsidy spending. On the whole, this means that the government will spend less, and the budget is contractionary, as the target is to lower the fiscal deficit to just below 6% of GDP from 6.4% in FY23. However, given the large and longer-lasting multiplier effects of capex spending on the rest of the economy, this still makes it a growth-oriented budget.
Unravel: Do you see India’s position in global supply chains become more, or less, important in the coming year, given India’s ambivalent attitude to global trading agreements?
Ms Kishore: No doubt India’s credentials as a supply chain destination have received a big boost in 2022 by Apple’s decision to begin assembling iPhone 14, its flagship model, in the country. What’s more, Apple is not alone in increasing its reliance on India. Samsung is reportedly shifting more of its electronics production to India, not only from China, but also Vietnam.
However, underneath the flurry of the news headlines and positive sentiment surveys, the data tells a more sobering story. Outside of rising US investment in computer software and hardware, which likely reflects Apple’s growing commitment, there is little sign of acceleration in other categories. More importantly, investment from Japan, traditionally a reliable FDI partner, has slumped since 2020. Instead, Japan is raising its investment in Thailand and Malaysia – fellow RCEP members.
The reality is that notwithstanding the progress being made on infrastructure construction and the fiscal concessions, a vibrant environment for attracting foreign investment still does not exist in India, especially in the high-tech sectors that are on the government’s radar. Adding onto this, is the government’s pivot back towards protectionism, which has caught the world by surprise.
This is a challenge for India’s supply chain ambitions since multinationals want to be able to freely bring in components and materials to achieve cost efficiencies. To truly realise its potential as a supply chain hub, India needs to drop its piecemeal approach, such as lowering import duties on mobile phone components to enable certain sectors and companies, and instead focus on broader measures to support and foster trade, both imports and exports, across sectors and categories. This will have a more lasting impact on India’s credentials as an advantageous supply chain destination.
Priyanka Kishore has more than a decade’s experience in macroeconomic research and forecasting, with a special focus on Asia. She is currently the Asia Economist for a leading peer group forum for CEOs and senior executives in the region, IMA Asia. Previously, Priyanka was Oxford Economics’ Chief India and South East Asia economist.