Introduction
India's economy is witnessing a remarkable surge in business activity, with the composite Purchasing Managers' Index (PMI) reaching its highest level in almost 14 years this month. This impressive performance, driven by robust demand and positive job growth, solidifies India's position as the fastest-growing major economy this year, continuing its strong expansion trajectory observed in recent quarters. The report, compiled by S&P Global and HSBC, paints a promising picture of India's resilience and potential for sustained economic growth in a dynamic global environment.
The Composite PMI Surge
The flash India Composite PMI, a crucial indicator of economic health, soared to 62.2 this month, surpassing the previous month's final reading of 61.8. Significantly, the index has maintained a consistent expansion trajectory, remaining above the 50-mark since August 2021. This remarkable streak underscores India's economic resilience and potential for sustained growth.
Driving Forces Behind the Expansion
The expansion was primarily fueled by a robust performance in the services sector, with the services PMI reaching a three-month high of 61.7, up from 61.2 in March. This surge was propelled by accelerating new business, a crucial indicator of demand. Meanwhile, the manufacturing PMI remained robust at 59.1, mirroring the level achieved in March. Both output and new orders for goods continued to grow at a strong pace, albeit slightly slower than the previous month.
International Demand and Business Outlook
International demand remained solid, with the composite sub-index reaching its highest level since its inclusion in the survey in September 2014. Buoyed by strong sales, the business outlook for the next 12 months improved from a four-month low in March, reflecting a growing sense of optimism among businesses.
Employment Generation
The rising demand prompted job growth, particularly in the manufacturing sector, where employment increased at the fastest pace in one-and-a-half years. However, employment generation among services firms slowed compared to March, indicating a potential need for further policy measures to support job creation in the sector.
Input Costs and Pricing
While input costs decreased for both goods producers and service providers, the strong demand enabled businesses to pass on these expenses to customers. Notably, manufacturing firms experienced a stronger increase in output costs compared to a slower rise in the services industry, reflecting varying pricing dynamics across sectors.
Expert Insights
Pranjul Bhandari, Chief India Economist at HSBC, highlighted the robust performance across manufacturing and services, driven by increased new orders, resulting in the highest composite output index since June 2010. Additionally, Bhandari noted that manufacturing margins improved in April as firms could pass on higher prices to customers due to strong demand conditions.
India's Economic Landscape
India's economic landscape has evolved from a mixed planned economy to a mixed middle-income developing social market economy, with significant public sector involvement in strategic sectors. Ranking as the world's fifth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP), India sits at 136th place in GDP (nominal) per capita and 125th in GDP (PPP) per capita.
From Independence to Economic Liberalization
From independence in 1947 until 1991, successive governments embraced a Soviet model, implementing protectionist policies and extensive state intervention, leading to the License Raj era. However, the end of the Cold War and a severe balance of payments crisis prompted India to embark on broad economic liberalization and indicative planning.
Since the early 21st century, India has experienced consistent annual GDP growth averaging between 6% to 7%. Historically, the Indian subcontinent boasted the world's largest economy until the advent of colonialism in the early 19th century. Presently, around 70% of India's GDP stems from domestic consumption, solidifying its position as the world's fourth-largest consumer market. Besides private consumption, government spending, investments, and exports also contribute significantly to India's GDP.
Economic Policies and Challenges
India's economic policies during the 2008 global financial crisis leaned towards Keynesian principles, employing stimulus measures to spur growth and stimulate demand, successfully revitalizing economic growth in subsequent years. However, the period from 2004 to 2014, often termed as India's "lost decade," saw the nation lagging behind other BRIC economies. Despite its economic strengths, India faces challenges such as high unemployment, escalating income inequality, and a decline in aggregate demand. The gross domestic savings rate stood at 29.3% of GDP in 2022.
Foreign Direct Investment and Trade Agreements
In terms of foreign direct investment (FDI), India attracted $82 billion in the fiscal year 2021–22, with leading sectors being services, computer, and telecom industries. The country has entered into free trade agreements with various nations and blocs, including ASEAN, SAFTA, Mercosur, South Korea, Japan, Australia, UAE, among others.
Sectoral Contributions
The service sector dominates India's GDP, accounting for over 50% and continuing to experience rapid growth, while the industrial and agricultural sectors employ the majority of the labor force. India hosts some of the world's largest stock exchanges by market capitalization, including the Bombay Stock Exchange and National Stock Exchange. Additionally, India ranks as the world's sixth-largest manufacturer, contributing 2.6% to global manufacturing output.
Concerns and Criticisms
While India's economic performance is impressive, concerns have been raised by independent economists and financial institutions regarding the government's alleged manipulation of economic data, particularly regarding GDP growth. Moreover, India's social spending as a share of GDP remains relatively low at 8.6% in the fiscal year 2021–22, compared to the average for OECD nations.
Conclusion
India's soaring business activity and resilient economic landscape position the country as a powerhouse in the global economy. With robust demand driving growth across sectors, positive job creation, and a favorable business outlook, India is well-poised to maintain its status as the fastest-growing major economy this year. However, addressing challenges such as income inequality, unemployment, and data transparency concerns will be crucial to sustaining this economic momentum and ensuring inclusive growth for all segments of society.
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