NEW DELHI (India CSR): GDP Growth: India’s gross domestic product (GDP) has crossed USD 3.5 trillion in 2022 and will be the fastest-growing G-20 economy over the next few years, but reform and policy barriers could hamper investment, Moody’s said on Tuesday.
Bureaucracy in decision-making may reduce attractiveness as FDI destination.
Key Highlights
- In a research report, the US-based rating agency said India’s GDP grew by 6.8% in 2022 compared to last year, making it the fifth-largest economy in the world1.
- Moody’s said India’s growth prospects are supported by a large young and educated workforce, increasing urbanization, government infrastructure spending, net-zero commitment, and a rebound of private consumption.
- However, Moody’s also warned that bureaucracy could slow approval processes in obtaining licences and setting up businesses, prolonging project gestation and reducing its attractiveness as a destination for foreign direct investment (FDI).
- Moody’s said India’s higher bureaucracy in decision-making will weigh on foreign investments in the country, especially when competing with other developing economies in the region, such as Indonesia and Vietnam.
- Moody’s said despite the economy’s strong potential, there is a risk that the pace of investment in India’s manufacturing and infrastructure sectors could slow because of limited economic liberalization or slower policy implementation.
- Moody’s said ongoing efforts by India’s government to reduce corruption, formalize economic activity, and bolster tax collection and administration are encouraging, although there are increasing risks to the efficacy of these efforts.
Analysis of GDP Growth
Moody’s report comes at a time when India is recovering from the impact of the Covid-19 pandemic and its subsequent lockdowns that disrupted economic activity and livelihoods.
According to the Economic Survey 2022-23 released by the Ministry of Statistics and Programme Implementation (MoSPI) on Monday, India’s economy is expected to grow at 7% (in real terms) for the year ending March 2023, following an 8.7% GDP growth in the previous financial year2.
The survey attributed the robust GDP Growth performance to a number of factors such as the near-universal vaccination coverage enabling people to spend on contact-based services, the surge in growth of exports, the strengthening of the balance sheets of the corporates and public sector banks, the higher capital expenditure by the central government, and the return of migrant workers to construction activities.
The survey also projected a baseline GDP growth of 6.5% in real terms in FY24 and said that GDP growth is expected to be brisk in FY24 as a vigorous credit disbursal and capital investment cycle is expected to unfold in India.
However, the survey also cautioned that there are downside risks to growth such as rising inflationary pressures, global uncertainties due to new variants of Covid-19, geopolitical tensions, trade protectionism, and environmental shocks.
Moody’s report echoed some of these concerns and highlighted the challenges that India faces in attracting foreign investment and enhancing its manufacturing and infrastructure capacity.
Moody’s said that while demand across the manufacturing and infrastructure sectors will grow 3-12% annually for the rest of the decade, India’s capacity will still rank well behind China’s by 2030.
Moody’s said that lack of certainty around the time needed for land acquisition approvals, regulatory clearances, obtaining licenses and setting up businesses can materially prolong project gestation.
Moody’s also said that India’s limited multilateral liberalization with respect to regional trade agreements will also weigh on foreign investments in the country.
Moody’s said that if implemented effectively, measures undertaken over the last few years – including those introduced during the pandemic to increase the flexibility of labour laws, raise agricultural sector efficiency, expand investment in infrastructure, incentivize manufacturing sector investment, and strengthen the financial sector – would lead to higher economic and GDP growth.
