India economic outlook, January 2024

From fragile five to first five, the country has come a long way in these 10 years to become a global economic powerhouse.

A decade ago, India’s economy underwent a rollercoaster ride when the US Federal Reserve (Fed) first hinted at raising policy rates and oil prices breached the US$90/barrel threshold. The current account deficit (CAD) in fiscal year 2013 was 4.7% of GDP (and it reached 6.1% of GDP in one of the quarters), and the foreign exchange reserve stood at approximately US$292 billion. Inflation stood at 10%, and the fiscal deficit was around 4.5%. Spooked by weakening economic fundamentals, investors quickly started withdrawing funds from the capital markets and consequently, the rupee depreciated significantly against the US dollar in 2013, losing over 20% of its value.

Fast forward 10 years to now, US Fed policy rates stand at 4.5% and oil prices are hovering around US$85/barrel—but that is where the similarities end. India’s CAD has narrowed to 1.9% of GDP in fiscal 2023 (and is expected to go down further in the next fiscal), while foreign exchange reserves have nearly doubled to US$568 billion. Current inflation stands at 5%, and the fiscal deficit is targeted to be 5.9% of GDP in fiscal year 2024.

India turned its story around in one decade—one that saw populism break through in the West in 2016, demonetization in 2017, the shadow banking crisis of 2018, a once-in-a-lifetime pandemic in 2020, the highest inflation in 40 years in the West (which still continues), and two wars since early 2022. Despite uncertainties, India managed to sail ahead while building its ship. Extrapolating from Professor Ricardo Hausmann’s “Scrabble” theory of economic development,1 India took determined and focused actions to convert know-how and capabilities into unique products and solutions. India’s emphasis on using technology to accumulate and diffuse tacit knowledge, building high-end manufacturing capacity, and improving competitiveness through exports formed the three necessary catalysts that boosted its growth trajectory and improved its economic fundamentals over the years.

We are optimistic about India’s near-term growth outlook as it reaps the benefits of the steps it has taken so far. We have upped our forecast for this year’s growth after the big bang GDP numbers we witnessed in the second quarter of fiscal 2024—that is between 6.9% and 7.2% or even higher—given the robustness observed in the industry sector. We believe momentum will be strong as the world recovers later in 2024, and as that global recovery tide lifts all boats, India will see much broader economic growth.

We are also cognizant of downside risks to global growth and that at least 64 countries—representing 49% of the combined global population—will head to the polls this year, which will add to political uncertainties.2 Although we have specified these in our assumptions (see sidebar), at the start of the year, we begin our outlook on an optimistic note.

The 10 years of foundation-building

India’s growth journey over the last decade can be explained using Dr. Hausmann’s Scrabble theory of economic development that compares economic growth with a game of Scrabble.3 Accumulation of know-how and capability sets are like letters in the board game while products are like words. In the game, possessing a higher number of letters not only increases the ability to make more words but also gives the player the edge needed to make longer and more complex words that most others with limited letters cannot make, thus gaining more “points.”

Keeping this in mind, let’s dive deep into the three capabilities (letters) that have driven India’s ability to create unique goods and services (longer or more complex words).

1. Infusing technology

India’s digital economy grew 2.4 times faster between 2014 and 2019, generating about 62.4 million jobs.4 As its know-how and capabilities were enhanced, India started creating newer and more complex products and solutions for its large consumer market, which not just worked as a testing ground but also soon presented opportunities to scale up. Government policy and initiatives also fostered innovation by building the required infrastructure and ensuring security and responsiveness.

Solutions from technology-led know-how resulted in greater financial inclusion (through innovative modes of digital payments such as unified payments interface [UPI]), formalization of credit (with account aggregator networks), and plugging revenue leakages (using online tax platforms and FASTag), among others.

For example, the introduction of online e-filing platforms and simplified income tax return forms like ITR-1 (Sahaj) have made filing taxes easier and more accessible. There has been a surge in the number of income tax filers and increased tax compliance, as digitization has made it easier to scrutinize income, wealth, and tax returns filed more efficiently. While strong growth and economic activity have largely contributed to higher tax collections, plugging loopholes through digitization has also helped (figure 1). Compliance with goods and services tax (GST) rules has also improved direct income tax collections, as digital information improved coordination across tax departments.

Another example is FASTag. Since its implementation in 2017, toll revenues have gone up 9.2 times to INR 413 billion in fiscal 2023, while over 10 years, average waiting times have come down from 734 seconds to 47 seconds, saving INR 700 billion worth of fuel.5

Higher revenues from tax collections and plugging loopholes have contributed to meeting the fiscal deficit gap and adding more resources for the government to spend on capex.

Ten years ago, banking penetration stood at around 25%.6 Thanks to JAM Trinity, in nine years, it has risen to 80% and even helped close the gender gap in many accounts.7 Figure 2 presents a summary of a few of the highlights in digitization over the past decade.

In the capital market, digitization has led to efficiencies such as faster settlements in the equity cash segment and mutual fund redemption, among others, helping investors accrue an annual average benefit of around INR 35 billion. Consequently, there has been a jump in domestic retail participation in the capital market, thereby increasing resources for alternate funding options. According to the Securities and Exchange Board of India (SEBI), the number of unique mutual fund investors jumped from 9.6 million in March 2014 to 41 million in October 2023. With greater participation, India can now harness digital capital to fund physical infrastructure even as foreign capital inflows remain volatile. And there is more capex forming via the equity and bond market by transposing the country’s digital capital–based infrastructure into real estate investment trust (REIT) and infrastructure investment trust (InvIT) frameworks (figure 3).

2. Branching into niche and complex manufacturing

The second catalyst of India’s growth has been the simultaneous focus on developing niche and complex manufacturing sectors and building the supporting physical infrastructure. Currently, manufacturing accounts for a mere 15% of GDP, with manufacturers mostly suffering from a lack of competitiveness, driven by high logistics costs, rising inflation, inadequate scale of production and operations, poor collaboration networks and ecosystems, lack of ability to connect know-how with investment, weak branding, and poor productivity. These factors have also limited the growth—and contributions to the economy—of micro, small, and medium enterprises, which are critical to the success of the manufacturing ecosystem. 

There has been an increasing realization that India needs this sector to expand to spur employment for low-skilled and semiskilled workers (and to absorb “disguised unemployed” workforces from the agricultural sector) and reduce dependence on critical goods and geographies. After the trade war between major nations and the COVID-19 pandemic, global supply chains have remained fluid and multinational corporations are looking for alternate geographies as investment destinations to diversify their supply chains. Amid stiff competition, India has a small window to move before supply chains freeze again.8

Consequently, government has focused on sectors that can capitalize on India’s competitive advantage in resources and skills, tap into local-market opportunities, and help the country climb higher on the manufacturing value chain globally. The Production Linked Incentive (PLI) scheme, tax incentives, the ease of effecting business reforms, the national infrastructure program, and the national logistics plan were announced with the intent to boost manufacturing, improve logistics to reduce costs and save resources, and gain from positive externalities. Again, variations in the subsidy-to-capex ratio (with more going toward IT hardware, medical devices, and telecommunications) show government’s intent to focus on “hi-tech” products that fall toward the higher end of global value chains.

According to research conducted by the State Bank of India, out of the estimated INR 5 trillion capex, government has received investment commitments for INR 3 trillion and 21% of committed capex, while 12% of planned capex has been spent in fiscal year 2023 with most capex activity likely to happen between fiscals 2024 and 2026.9 Increased manufacturing capacity has aided in improving share of exports (although it is still relatively small) and narrowed merchandised trade deficit of certain high-end goods (figure 4). The effect likely will be more pronounced as anticipated capex-building activity intensifies.

And while India continues to focus on manufacturing, it must meet the demand for cleaner and alternate-source energy. Industry dependence on fossil fuels exposes the country to geopolitical tensions and—consequently—to the vulnerability of such supply chains and prices, thereby eroding competitiveness. Besides, there will be pressure from nations that impose restrictions on imported products and substitutes based on their carbon-intensity. While such a transition will be capital-intensive and require huge spending for supporting infrastructure, renewable energy sources are relatively more evenly distributed and harnessing them to meet growing demand will help India enjoy a greater degree of energy security and independence in the long run, besides improving several economic parameters.

3. Underscoring competitiveness through exports

The third catalyst is a robust emphasis on exports. According to Adam Smith’s theory, a nation can specialize depending on the market it serves.10 Trade opens up new markets and, therefore, boosts the scope of specialization as it integrates a new nation with the rest of the global value chain. Focusing on exports will compel manufacturers to scale up and meet international regulatory requirements and quality standards, thereby improving competitiveness and productivity.

Over the last decade, India has diversified its export basket and moved toward higher value–added products as policymakers realized that if India were to compete with the rest of the world, it had to produce high-quality, cost-competitive goods, while increasing product complexity.

As a result, the proportion of engineering goods, pharmaceuticals, and electronics goods in total exports increased, while traditional baskets’ share fell. More importantly, services exports are increasingly offsetting the merchandise deficit by 25%, while non-IT services exports are also rising.

The near-term outlook

Improving fundamentals have buoyed our outlook and we expect India to grow between 6.9% and 7.2% through fiscals 2023 to 2024 in our baseline scenario, followed by 6.4% and 6.7% over the next year (figure 6) (for more on our baseline and pessimistic scenarios, see sidebar). High inflation is expected to persist till the second half of fiscal 2024 due to high food and volatile oil prices and soften thereafter (figure 7). 

The building of new know-how and capabilities will have strategic implications on how businesses, industries, governments, and citizens interact with each other and come together to make complex products, services, and solutions.

India will have to be more competitive and further scale up commoditized products by taking advantage of its large domestic market. It is crucial for business leaders and policymakers to leverage new, complex linkages that arise out of the country’s knowledge pool to help create a positive and sustainable impact for businesses and the economy.

Tapping into the burgeoning climate for investment and trade opportunities by intensifying technology transformation and improving governance, while working toward achieving decarbonization goals for sustainability, will ensure inclusive and broad-based growth.

Key assumptions

Deloitte’s assumptions can be grouped into two buckets, namely an “optimistic” and a “pessimistic” scenario, with the former being more likely.

Optimistic scenario

Regional wars remain contained without having major implications for global supply chains and economy. Growth in the United States and the European Union will likely rebound later in 2024. There is political stability after elections in India and other major industrial nations such as the United States.

  • The US Fed continues to pause policy rate hikes as inflation moderates.
  • Crude oil prices remain low and range-bound as a Chinese economic slowdown and pace of global energy transition keep oil prices from rising.
  • The Reserve Bank of India maintains a tighter monetary policy to ensure no strains on the lending sector.
  • Government efforts toward consolidation of expenses continue, supported by buoyant revenues, even though expenses go up due to upcoming elections.
  • State and central election results do not bring any political instabilities.
  • Robust infrastructure capex and PLI capacity investment boost private investment spending.

Pessimistic scenario

The Russia-Ukraine crisis continues for a prolonged period. Tensions escalate with several nations getting directly involved in the war. The United States and Europe enter a recession with significant political upheavals. The crisis in the banking system raises significant tail risks for economic activity.

  • Prolonged crises lead to second-order implications on financial stability and supply chain disruptions.
  • Crude oil prices breach the US$110/barrel ceiling.
  • Political instability ensues after central and state elections impact market sentiments.
  • Inflation spirals up both globally and domestically, impeding investment growth.
  • Climate inaction leads to more natural disasters that weigh on growth, further dampening sentiment.
  • The Reserve Bank of India effects further hikes but retracts later as growth tumbles.
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  1. Ricardo Hausmann, “Economic development and the accumulation of know-how,” Welsh Economic Review 24 (2016): pp. 13–16.

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  2. Koh Ewe, “The ultimate election year: All the elections around the world in 2024,” Time Magazine, December 28, 2023.

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  3. Hausmann, “Economic development and the accumulation of know-how,” pp. 13–16.

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  4. Dhirendra Gajbhiye, Rashika Arora, Arham Nahar, Rigzen Yangdol, and Ishu Thakur, “Measuring India’s digital economy,” Reserve Bank of India Bulletin 76, no. 12 (2022): pp. 131–151.

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  5. Press Information Bureau, “Statement from the Ministry of Road Transport and Highways,” press release, June 27, 2023.

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  6. Siddharth Tiwari, Frank Packer, and Rahul Matthan, “Data by people, for people,” International Monetary Fund, March 2023.

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  7. PIB, “Statement from the Ministry of Road Transport and Highways.”

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  8. Economic Times, “India has a 2–3 years window to attract companies moving out of China: BVR Subrahmanyam,” December 8, 2023.

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  9. Namrata Mittal, “Will PLI schemes lead to a manufacturing renaissance,” Money Control, August 16, 2023.

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  10. Adam Smith (Introduction by Robert Reich), The Wealth of Nations (New York: Modern Library, 2000).

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The author would like to thank Moumita Paul for her contributions to the article.

Cover image by: Jaime Austin