As is normally the case, everything in the economy cannot go well in any year. There are bound to be several hits and misses. On balance, it can be said that the Indian economy has come out stronger with an even chance to accelerate the growth momentum in 2024.

External shocks that have been known to dislodge the world economy have become less potent as countries have learnt to become more independent. The contagions that typified such crises have been diluted though admittedly Covid-like shocks did bring the world to a standstill. How can the year then be evaluated?

The hits have been quite stark. To begin with India still retains the title of the fastest growing large economy with growth of around 7 per cent expected this fiscal. The significant part is that this growth rate has been achieved even though the monsoon has not been satisfactory with the El Nino effects still leaving its mark on the kharif and rabi harvests. This kind of resilience can be attributed more to the relentless push given by the government to capex and growing private sector interest, albeit in limited sectors linked to infrastructure.

Second, the currency has been a star performer and been range-bound with rather tactful interventions by the RBI using the abundant forex reserves to stabilise the rupee when required. Hence, the rupee has always remained at the median level of change vis-à-vis competing countries.

This has ensured that the exports have not been adversely affected by a stronger rupee, and nor has panic set in due to a depreciating rupee. There has been certainty for companies borrowing from global markets in terms of evaluating foreign currency risk.

Third, the overall fiscal situation has been managed well at both the Central and State levels. This is more an outcome of return to normalcy and the overarching influence of the FRBM norms which ensure that States do not breach their fiscal targets, while the Centre has imposed self-discipline on this front. Hence, even though there have been several announcements made by political parties at the time of elections to provide additional sops, the overall fiscal numbers remain unchanged, even while the character of budgets in the form of composition of spending could alter.

This is important because as long as deficits are under control there are few chances of there being pressure on liquidity and the crowding out of the private sector. The RBI has to be given credit again for ensuring this smooth process.

Fourth, the capital market has been extremely buoyant with the stock indices crossing new heights. The optimism regarding the India story has been one driving factor behind this phenomenon. Both the primary (equity and debt) and secondary markets (equity) have kept the sentiment positive even though FPI investments have been volatile.

Domestic institutional investors have played a decisive role here and hence more than made up for the rather fickle FPI flows which have been guided by the decisions of foreign central banks.

Fifth, the banking sector has returned to normal which is what is expected when the economy moves to a higher growth trajectory. We need to have a healthy financial system that can provide funding for investment. It can be said with fair degree of confidence that the system is not just well-capitalised but also has a strong asset quality attribute with NPAs at around 3.5 per cent and a quarterly slippage ratio of less than 0.5 per cent.

The pain points

How about the misses? The CPI inflation number has been quite volatile with food inflation being the main driver. Interventions through export bans have not helped at all. Increasing imports have only helped to cool down prices at the margin. Putting curbs on stock limits have been counterproductive as it has created more panic in the market.

Onions, tomatoes, dairy products, pulses, spices, rice and wheat among others have been driving up inflation. The only hope is that statistically these numbers would come down due to base effects. The kharif harvest is expected to be lower than last year while the rabi sowing is still underperforming.

Second, rural demand is yet to stand up. There have been differing views here. Corporates have stated quite clearly in their investor presentations that high inflation has affected rural demand and it is mainly the premium products that have sold well. This holds also in the case of automobiles.

However, monthly data from the retail side does indicate that the festival sales, which came in late this year, have picked up. But it should be noted that the exhaustion of pent-up demand post-Covid relaxation and cumulative inflation of nearly 25 per cent in the last three-and-a-half years has come in the way of overall demand.

Third, the private sector investment cycle has not been broad-based. The problem is related more to the second factor, that is, demand. As long as demand is inadequate there is likely to be excess capacity in several consumer-oriented sectors. Therefore, investment has been limited to infra-oriented sectors like cement, steel, chemicals, etc. In fact, curiously the new investment announcements made so far this year are more in the services sector with heavy concentration in airlines followed by power. This has been a nagging issue even before the pandemic and hence is a stumbling block in our growth momentum.

Last, while the external sector on the whole has been well-managed as seen in the build-up of forex reserves as well as stable rupee, the internals have been a worry. FDI was in the region of $70 billion in FY23 and looks unlikely to be much better in FY24. With monetary tightening now on, the flow of surplus funds has ebbed. Further, exports of both goods and services have been sub-optimal. While the former is understandable given that global trade has slowed down, services, especially software, was supposed to replicate the success of FY23. This has witnessed some setback. One may hope that this is only transient.

Hence, on the whole, the Indian economy would be emerging a winner. The challenges have been mainly exogenous, especially when it comes to food inflation or the external sector. With global conditions also expected to improve in 2024, it would be reasonable to assume that the economy is set to enter a new growth trajectory next year.

The writer is Chief Economist, Bank of Baroda. Views are personal