MARKET REVIEW

MANAGEMENT DISCUSSION AND ANALYSIS

Global Economy:

The global economy faced several challenges in CY 2022, starting from the initiation of the Russia-Ukraine war, supply chain disruption, high inflation, and high key policy rates by the central banks. Global inflation remained a matter of concern in most of the economy, which reached a multi-year high of 8.7% in CY 2022. Monetary tightening by the central banks across the world helped bring the trajectory downwards. The unwinding economic events weighed down global economic growth prospects. World economic growth in CY 2022 is estimated to have declined from 6% in CY 2021 to 3.4%, as per IMF.

Commodity prices eased the early gains of CY 2022 amidst supply chain issues and China’s Zero Covid policy due to the demand slowdown. Metal prices, however, stabilised following China’s reopening and measures to revive its economy and retracing inflation in advanced economy like USA and EU.

Europe's fight against the repercussions of war

Europe was significantly impacted by the war, which led to high energy and food prices created by the supply-chain disruption. This stretched the purchasing power of the consumers while also impacting the manufacturing sector, that led to production cuts. In Q4 CY 2022, the energy crisis improved, supported by high gas inventory levels, favourable weather conditions, and the central bank’s monetary policy tightening, which eased inflation. IMF estimates the Euro area to have grown by 3.5% in CY 2022 ^[1]. The monetary tightening is expected to limit the GDP growth in CY 2023 to 0.8% before increasing to 1.4% in CY 2024.

US Economy strong against recession fear

Inflation in the world’s largest economy soared to a 40-year high, mainly driven by low labour participation and supply-chain crisis influenced by the external environment. The subsequent monetary tightening by the Federal Reserve Bank impacted the country’s economic growth. Rising fed rates led to a further strengthening of the US dollar, thus stretching the current account deficit of import-dependent countries. Despite the negative outlook,the US economy has performed better than expected. The inflation level which reached 9.06% in June 2022 declined to 6.04% in February 2023 ^[2]. The US economy grew by 2.1% in CY 2022 but is expected to decelerate to 1.6% in CY 2023 and 1.1% in CY 2024 ^[1].

Central Banks' Interest Rates (%)

Source: CEIC, S&P Global, World Bank

World Bank Commodity Index (Base: Dec-2021) (%)

China’s reopening to drive global economy

The Chinese economy dealt with multiple challenges in CY 2022, including the real estate sector slowdown, severe COVID-19 infection, and its mitigation with Zero-COVID Policy. Unlike other countries, its central bank loosened the monetary policy to encourage domestic growth, in addition to the stimulus package to boost consumption. China’s manufacturing activity after facing a slowdown in CY 2022 with a growth of 3% is coming out strong and is projected to grow by 5.2% in CY 2023 and 4.5% in CY 2024 ^[1].

Global Economy Outlook:

Performance of the global economy was better than earlier projections, given the lower-than-expected severity of the Russia-Ukraine war and high energy prices. Manufacturing PMI, which fell below the 50-level mark is moving up in most economies. China’s re-opening has further improved the expectation of increased economic activities, generating positivity for the global economy. Inflation levels in most of economies peaked, but expected to fall to 6.6% in CY 2023, improving global financial conditions and business sentiment.

IMF projects the global economy to grow by 2.8% in CY 2023 before rebounding to 3% in CY 2024, though the worries of war and high inflation still persist ^[1].

Global GDP Growth (%YoY)

Source: IMF

Indian Economy:

The Indian economy performed exceptionally well compared with the rest of the world. India is set to retain its bright spot in CY 2023 with a potential to contribute 15% to the global GDP growth, according to IMF. In December 2022, India also assumed G20 presidency with an ambition to unite the world under the theme ‘Vasudhaiva Kutumbakam” or “One Earth · One Family· One Future". This is an opportunity to showcase the nation’s global leadership amidst growing uncertainty and economic crisis.

India’s manufacturing sector also outperformed the rest of the world, projecting the country as a potential manufacturing hub. Stable political conditions, supportive policy schemes, strong domestic consumption and growing presence of skilled professionals support this ambition. India’s manufacturing PMI remained above the 50-level mark through the year, indicating positive performance.

India’s export, including services and merchandise touched US$750 billion in FY 2023 supported by robust policy implementation by the Indian government. GST collection also reached ₹18.1 trillion, a year-on-year growth of 21.4% in FY 2023 ^[6]. Other economic indicators like non-food credit, automobile sales and electricity consumption have also registered robust growth. These indicators are well-supported by consumer sentiment indices, which witnessed consistent monthly year-on-year double digit growth ^[6].

India’s rising retail inflation was of concern. Fiscal stimulus support and additional monetary support resulted in the CPI level crossing RBI’s upper tolerance levels. Sustained vigilance and multiple rate hikes by the RBI, resulted in repo rate increasing from 4% to 6.5% in February 2023. This significantly controlled the CPI level; from a peak of 7.8% in April 2022 ^[7], it reached below the upper tolerance limit in November and December of 2022, before reaching 6.4% in February 2023 ^[8].

Policy initiatives by the Government of India (GoI)

The GoI’s focus to make the country an attractive destination for business has been a key enabler of robust economic performance. The capital expenditure allocation of ₹10 lakh crore for FY 2024, an increase of 37.4%, YoY, has been an exceptional step. The approach towards infrastructure development and inclusive growth of the country is setting the foundation for multiple years of strong growth.

The World Bank has emphasised the collaboration between nations to boost global GDP growth in the current decade. GoI has taken steps in this direction, establishing bilateral trade relations through Free Trade Agreements with Australia and UAE, vastly expanding the market for domestic manufacturers. The upcoming negotiation with the UK, EU, and GCC nations are expected to further expand the horizon. As India aspires to be the global manufacturing hub, these trade deals will ensure a smoother transformation of the global supply chain. The removal of export duty on iron ore above 58% Fe grade and steel has encouraged the sector to have global competency amid commodity volatility.

The National Logistic Policy, another ground-breaking policy initiative by the GoI targeting the complex logistic system, is likely to make India more efficient in project implementation. The plan to reduce logistics cost from 14% to less than 10% is expected to expand the scope of government spending and streamline government operations.

Source: RBI, CMIE

Source: RBI, CMIE

Indian Economy Outlook

Although global projections of economic growth for CY 2023 loom on uncertainties, India on the other hand is expected to outperform. As per IMF, Indian economy is projected to grow at 5.9% in FY 2024 ^[1] after having grown at an estimated 6.8% in FY 2023, to be among the fastest growing major economies. It further projects India and China to contribute to half the global growth in CY2023. India’s economic growth will be driven by robust domestic demand supported by the government’s continued thrust on infrastructure spending.However, external challenges of global economic slowdown, geo-political scenario and energy price uncertainties may keep the Indian economy vigilant.

India’s growth outlook by domestic and global agencies

Source: CMIE

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