India’s economy continues to expand as inflation moderates

The Indian economy showed rapid growth in 2022, the second consecutive year of strong recovery following deep economic contraction in 2020 due to the COVID-19 pandemic. According to India's National Statistical Office, the First Advance Estimate for real GDP growth for FY2022-23 is 7.0% year-on-year (y/y). Economic momentum has remained strong in early 2023, with the S&P Global India Services Business Activity Index for April having signaled the fastest expansion in output and new orders since mid-2010.

India has also become an increasingly attractive location for multinationals across a wide range of industries, with foreign direct investment inflows (FDI) having reached a new record high of USD 84 billion in the 2021-22 fiscal year. Foreign direct investment inflows into the manufacturing sector rose by 76% y/y in 2021-22, reaching a level of over USD 21 billion.

India's economic expansion continues in early 2023

Recent economic indicators for India during early 2023 continue to signal expansionary economic conditions, although the pace of economic growth has moderated in recent quarters. After rapid economic growth in the April-June quarter, driven by post-pandemic pent-up demand, growth moderated in the second half of 2022 as higher inflation, tighter monetary policy, and a weaker rupee reduced demand.

The index of industrial production, which generally shows considerable monthly volatility, recorded growth of 5.6% y/y in February. For the first eleven months of FY2022 from April to February, industrial production was up 5.5% y/y, with manufacturing output rising by 4.9% y/y over the same period. India's passenger vehicle sales grew by 26.7% y/y in the 2022-23 fiscal year, according to data from the Society of Indian Automobile Manufacturers (SIAM). The rapid growth in vehicle sales was helped by easing of shortages of semiconductors and strong demand for utility vehicles.

The seasonally adjusted S&P Global India Manufacturing Purchasing Managers' Index (PMI) for April indicated the fastest improvement in the health of the manufacturing sector in the calendar year-to-date, rising from 56.4 in March to 57.2 in April.

New orders placed with goods producers rose at the quickest pace since December 2022. Likewise, output increased at a sharp rate that was the most pronounced in four months. More than one-quarter (26%) of all survey participants reported higher production volumes, citing sustained expansion in sales.

India's service sector economy has also continued to show strong expansionary conditions, according to recent S&P Global PMI survey results for early 2023. The seasonally adjusted S&P Global India Services PMI Business Activity Index surged higher from 57.8 in March to 62.0 in April and signalled the fastest expansion in output and new orders since mid-2010. Anecdotal evidence linked the upturn to a pick-up in new business growth and favourable market conditions.

Inflationary conditions

Although manufacturers signalled higher operating costs in April — linked to fuel, metals, transportation and some other raw materials — the overall rate of inflation remained below its long-run average despite quickening since March. Manufacturing output prices have also remained constrained, with 6% of companies having hiked their output prices since March, while 92% left them unchanged. However, the combination of rising input costs and resilient demand resulted in services companies lifting their selling prices in April.

The global geopolitical and economic fallout from Russia's invasion of Ukraine exacerbated inflation pressures during 2022, with headline consumer price inflation surging to an eight-year high of 7.8% y/y in April 2022. After moderating to 5.7% y/y in December 2022, CPI inflation rose again to 6.4% y/y by February 2023, reflecting higher food prices, but eased back to 5.7% y/y by March 2023. Following the surge of Brent crude oil prices to above USD120 per barrel in March 2022, world oil prices have gradually declined to USD80 per barrel by end April 2023, which will help to constrain domestic fuel and transportation prices.

Higher food prices have been a key factor pushing up CPI inflation again in early 2023, notably for cereals. Annual CPI inflation is expected to moderate from 6.7% in 2022 to 5.4% in 2023, helped by lower energy prices compared to their peaks in mid-2022.

In response to rising inflation and aggressive policy tightening by the US Federal Reserve (Fed), the Reserve Bank of India (RBI) raised its policy repo rate by 225 basis points to 6.25% between April and December, taking it to above the pre-pandemic level of August 2019. A further 25bp rate hike in February 2023 pushed the policy repo rate to 6.5%. At its meeting in April, the MPC of the RBI decided to keep the policy repo rate on hold. The MPC decided that as the policy rate has been increased by a cumulative 250 basis points since May 2022, which is still working through the system, the policy repo rate would be left unchanged at 6.50% at the April MPC meeting. The near-term trajectory of CPI inflation is projected in the RBI Monetary Policy Statement at 5.4% y/y for the April-June quarter of 2023-24.

Foreign direct investment

Net new foreign direct investment into India has risen very rapidly in recent years, with FDI reaching a new record level of USD 84 billion in the 2021-22 fiscal year, after inflows of USD 82 billion in the 2020-21 fiscal year. This compares with FDI inflows of just USD 4 billion in the 2003-04 fiscal year. Rapid growth in FDI inflows has been evident over the past decade, with technology-related FDI having become an important source of investment. The Computer Software and Hardware sector was the largest recipient of foreign direct investment equity inflows in the 2021-22 fiscal year, at around 25% of the total inflows.

US technology firms have been a key source of recent FDI inflows into India. In 2020, Google established the "Google for India Digitization Fund", through which it announced plans to invest USD 10 billion into India over seven years through a mix of equity investments, partnerships, and operational, infrastructure and ecosystem investments. Also in 2020, Facebook announced an investment of USD 5.7 billion in Jio Platforms, owned by Reliance Industries Limited.

Infrastructure investments have also been an important sector for FDI inflows. A large FDI deal in 2020 was the USD 3.7 billion investment by Singapore's GIC and Canada's Brookfield Asset Management in the acquisition of Tower Infrastructure Trust, which owns Indian telecom towers assets.

In the 2020-21 fiscal year, FDI from Saudi Arabia also rose sharply, reaching USD 2.8 billion. Saudi Arabia's Public Investment Fund acquired a USD 1.5 billion stake in Jio Platforms and a USD 1.3 billion stake in Reliance Retail in 2020.

Reliance Retail also received investment from other foreign firms in 2020, with Singapore's GIC and TPG Private Capital having invested a combined amount of USD 1 billion, while US private equity firm Silver Lake Partners also invested USD 1 billion.

Unicorns

The rapid growth in numbers of Indian unicorns (start-ups that have achieved a valuation of over USD 1 billion) over the past five years has also become a major focus for foreign direct investment inflows into India. By 2022, there were an estimated 107 Indian unicorns, with 44 of these having reached unicorn status within the 2021 year and 21 in the 2022 year, according to Invest India, the National Investment Promotion & Facilitation Agency.

Indian start-up firms have attracted large-scale foreign direct investment from global venture capital and private equity firms such as Blackstone and Sequoia Capital. Japan's SoftBank has been a leading global investor in Indian tech start-ups, having invested over USD 14 billion into Indian firms over the past decade, with an estimated USD 3 billion of new FDI in calendar 2021.

Electronics sector investment

As in many other auto manufacturing hubs worldwide, global semiconductors shortages caused significant disruption to Indian auto production in 2021, constraining new auto output and sales. With India still highly reliant on imported chips, the Indian government announced a large new incentive package of USD 10 billion in December 2021, to try to encourage the development of semiconductors and display manufacturing in India. The new incentive scheme will provide 50% financial support for the cost of establishing new semiconductors fabrication and packaging plants as well as display plants in India. Many major international electronics firms have commenced initial discussions about establishing production facilities in India. India already has strong capabilities in semiconductor design, with an estimated 24,000 design engineers working in India. The federal government will work with state governments in order to establish high-tech clusters for semiconductor fabs and display fabs.

India has already made considerable progress in developing its domestic electronics manufacturing industry over the past decade, with total electronics manufacturing estimated to have risen from USD 30 billion in 2014-15 to USD 75 billion in 2019-20. The growth in electronics exports has been helped by rapid growth in exports of mobile phones as major global electronics firms have rapidly expanded their production of mobile phones in India. India's mobile phone exports rose from USD 0.2 billion in the fiscal year 2017-18 to USD 3.2 billion in the 2020-2021 fiscal year, rising further to USD 5.5 billion in the 2021-22 fiscal year.

Indian economic outlook

The acceleration of foreign direct investment inflows into India over the past decade reflects the strong long-term growth outlook for the Indian economy. India's nominal GDP measured in USD terms is forecast to rise from USD 3.5 trillion in 2022 to USD 7.3 trillion by 2030. This rapid pace of economic expansion would result in the size of the Indian GDP exceeding Japanese GDP by 2030, making India the second largest economy in the Asia-Pacific region. By 2022, the size of Indian GDP had already become larger than the GDP of the UK and also France. By 2030, India's GDP is also forecast to surpass Germany.

The long-term outlook for the Indian economy is supported by a number of key growth drivers. An important positive factor for India is its large and fast-growing middle class, which is helping to drive consumer spending. The rapidly growing Indian domestic consumer market as well as its large industrial sector have made India an increasingly important investment destination for a wide range of multinationals in many sectors, including manufacturing, infrastructure and services.

The digital transformation of India that is currently underway is expected to accelerate the growth of e-commerce, changing the retail consumer market landscape over the next decade. This is attracting leading global multinationals in technology and e-commerce to the Indian market.

By 2030, 1.1 billion Indians will have internet access, more than doubling from the estimated 500 million internet users in 2020. The rapid growth of e-commerce and the shift to 4G and 5G smartphone technology will boost home-grown unicorns like online e-commerce platform Mensa Brands, logistics startup Delhivery and the fast-growing online grocer BigBasket, whose e-sales have surged during the pandemic.

The large increase in FDI inflows to India that has been evident over the past five years is also continuing with strong momentum in 2021 and 2022. This is being boosted by large inflows of investments from global technology MNCs such as Google and Facebook that are attracted to India's large domestic consumer market, as well as a strong upturn in foreign direct investment inflows from manufacturing firms.

Overall, India is expected to continue to be one of the world's fastest growing economies over the next decade. This will make India one of the most important long-term growth markets for multinationals in a wide range of industries, including manufacturing industries such as autos, electronics and chemicals to services industries such as banking, insurance, asset management, health care and information technology.

Rajiv Biswas, Asia Pacific Chief Economist, S&P Global Market Intelligence

Rajiv.biswas@spglobal.com

Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.