India 2023 Outlook: Strategic opportunity

Global shifts provide India the opportunity to expand its economic heft
Group Research, Radhika Rao01 Dec 2022
  • Global shifts provide the opportunity to expand its economic heft
  • Domestic sector strength is likely to partly offset unfavourable externals
  • We expect macro stability to sustain, tracking a gradual consolidation path
  • USD/INR to consolidate within 80-84 in 2023-2024
  • Tight liquidity and heavy bond supply are expected to persist in 2023
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ECONOMICS (Radhika Rao)

India’s economy overtook the United Kingdom to become the fifth largest in the world on nominal GDP (US dollars), besides retaining its third spot on Purchasing Power Parity (PPP) basis. This marks a fast climb from the ninth position a decade ago. India is presented with a strategic opportunity to expand its economic heft to assume a greater role in the world arena as well as amongst the investment community. Besides the inherent domestic momentum, global forces, marked by volatile geopolitics, supply chain dislocations, trade skirmishes, climate change and challenging demographics, provide the ignition to lift the economy towards its goal of $5trn nominal GDP from estimated $3.4trn this year.

Three levers will be key in this regard and have already been set into motion.

  • Manufacturing push and supply chain rejig

Government’s policies have increasingly been tailored towards supporting and expanding the economy’s manufacturing footprint, as a source of improving trend growth and employment (see our reports Understanding India: Growing footprint in electronics and Understanding India: Manufacturing push – a reset)

Globally, trade conflicts and protectionist policies have highlighted fragilities of existing global value chains, magnified by the pandemic. Firms have added resilience and reliability to their matrix of priorities when sourcing supplies and suppliers, in effect widening the net for fresh new potential sources. This has provided a good opportunity for India to enter the fray to attract part of these capacities.

  • Digital architecture

India’s digital architecture has strengthened significantly in the past five-six years, including the universe of finance, payment systems, nationwide identification framework, distribution of welfare schemes, healthcare official data stack intended to solve social/ inclusion needs, and logistics, besides others. This has been supported by a sharp rise in mobile phone subscribers (~700mn) and increasing internet penetration.

  • Energy transition

India has committed to lowering its emission intensity and increase non-fossil capacity to 500GW by 2030. Maintaining strong growth while making this shift presents a challenging yet crucial opportunity to establish a decarbonised recovery path. Encouragingly, renewable installed capacity has already reached two-thirds of the initial target set in 2015. To move towards the net-zero target by 2070, incremental steps will be necessary in the short-term, including disincentivising fresh investments into fossil sources, retrofit energy-intensive industries as well as the power sector, new capital investments to have inbuilt green accreditations and balance the fiscal/ economic fallout

These key pillars of medium-term growth, in addition to catalysts like increasing public sector expenditure on physical infrastructure, other supply-side reforms (GST and better tax compliance, bankruptcy court, bad bank etc.), and favourable demographics are expected to set the economy on a virtuous cycle of recovery. For instance, widespread adoption of real-time payments is estimated to have unlocked ~0.56% of the country's GDP [2]. An increase in manufacturing sector as % of GDP from 18% to 19% handle of GDP can add 0.5-0.6% of the headline GVA. Besides a salutary impact on labour/ capital inputs, contribution via total factor productivity is likely to gradually return to pre-2018 contribution levels. We expect growth to stabilise around 6.0% over the next five years.

Macro environment for the year ahead

India stayed on track with its reopening in 2022, benefiting from significant vaccination coverage and low fatality rates from the subsequent Covid sub-variants. This allowed for the economy to emerge amongst the regional outperformers on growth and financial markets action.


  • Domestic demand to trump exports in supporting growth
  • Government capex spending to lead the growth cart
  • Goods and service exports face a challenging outlook

Inflation and policy direction

Retail inflation prints peaked in Sep22 and have since begun to ease, helped by favourable base effects. Undercurrents of sticky food inflation is expected to subside on the back of harvest arrivals in Nov, with high-frequency numbers pointing to a pullback in perishables even as cereals retain momentum. Incremental imported price pressures have ebbed as global crude prices are off highs. Core inflation segments, meanwhile, are likely to be slow to correct given the catch-up in service sector pressures and lagged pass through of input price adjustments.

Fiscal health

Strong revenue, particularly from taxes (direct up 24% in first half of FY22), has been a key tailwind to consolidation efforts, on the back of hastened formalisation and windfall from excise fuel taxes. This helped to offset a bigger subsidy bill and an increase in capex allocations.

External balances

We expect broader macro stability to prevail with a deterioration in current account balances to ease in 2023 and fiscal deficit to consolidate.


Risks to our scenario stem from a sharp and synchronised slowdown amongst the global economies on the back of this year’s overt policy tightening moves, which might negate India’s domestic growth impulses and lead to a steeper pullback. Energy commodity price direction is a wildcard if price action deviates significantly from our oil analysts’ forecasts of $85-90/bl in 2023.


We see USD/INR consolidating between 80 and 84 over the next two years. We do not consider the INR as an over-valued currency. During the USD’s surge in 2022, RBI kept the INR aligned with the depreciation in the Asia ex-Japan currencies on an indexed basis via currency interventions and positive interest rate differential against the US.


Recent rally and sharp flattening in INR OIS curve suggest that markets are pricing for the approaching end of RBI's hike cycle. Policy repo rate is currently priced to peak at around 6.50% by 1Q23, which is in line with our forecast. However, with inflation proving to be sticky, the risks are skewed towards a higher peak in policy repo rate in 2023, rather than lower. 1Y-5Y OIS curve is also inverted, pointing to expectations for some rate cuts to happen as soon as 4Q23.

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Radhika Rao

Senior Economist – Eurozone, India, Indonesia

Philip Wee

Senior FX Strategist - G3 & Asia

Duncan Tan

Rates Strategist - Asia

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