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India's economic reforms will help boost potential growth beyond 6%: Goldman Sachs

Govt policy of absorbing food price shocks and providing counter cyclical stimulus should continue next year with the general election coming up in 2024, the brokerage said.

November 24, 2022 / 02:51 PM IST
Representative image

Representative image

India continuing with economic reforms over the medium term will help boost the potential growth beyond the currently estimated 6 percent, Goldman Sachs said in its 2023 outlook.

“The biggest opportunity for India to spur economic growth and job creation in this decade, is to develop globally competitive manufacturing hubs as the world restructures the supply chains,” the brokerage said.

“However, to really become a manufacturing powerhouse will require a coordinated strategy across all related government departments to truly make it easy for global manufacturing to set up shops in India,” it added.

India’s government is expected to present its budget for the next financial year on February 1 amid expectations that it would continue with reforms  and infrastructure spending to boost medium-term growth.

The government has been focused on boosting domestic manufacturing over the last several years and has also increased its spending on infrastructure to crowd in private investments. It has also launched several production linked incentive schemes to boost manufacturing across sectors.

While the global slowdown muddles the export outlook, the country must focus on domestic drivers of demand, India’s chief economic adviser has said. The official assesses India’s medium-term growth between 6.5 percent to 7 percent.

Right now, the conditions are conducive for an investment cycle recovery, according to Goldman Sachs.

In the current fiscal year, the government’s capital spending has risen 25 percent on year to 2.9 percent of gross domestic product. Capital expenditure by the government has a GDP growth multiplier of 2.5X4, and may help crowd in further private investments, it added.

The central government has also been cushioning citizens from global price shocks by slashing taxes on fuels and bolstering its food and fertilizer subsidies as it has had better than expected revenue collections.

This policy response, of absorbing food price shocks through subsidies and providing counter cyclical stimulus through capex, should continue next year with the general election coming up in 2024, Goldman Sachs said.

Meanwhile, India’s current account deficit is likely to remain wide given export drag from the global slowdown, though resilient services exports will provide some cushion.

However, growth capital may continue to chase India, as global firms are looking to diversify sources of supply and India presents an attractive opportunity over the long term, the brokerage added.

With policymakers likely to ease barriers to foreign portfolio inflows to achieve inclusion in global bond indexes in coming years and given the view of an impending dollar peak, the dollar-rupee exchange rate is forecasted at 84, 83 and 82 over three-, six- and 12-month horizons.
Moneycontrol News
first published: Nov 24, 2022 02:51 pm