Inflation management remained the focus of global policy makers while the economic performance varied across nations. While US seems to have done well, UK, EU continue to remain under stress. India became the fastest growing economy among large nations. Here is a look at some of the developments of the year.
Despite the global uncertainty, year 2023 saw significant recovery in India’s economic performance. GDP for the first half of FY24 (April-Sept’23) recorded impressive growth of 7.7%, significantly better than most projections. The most promising development was growth of 14% in the manufacturing sector GVA. Several high-frequency indicators have shown continued momentum in the sector during Oct-Nov’23 also. While it may be too early to say and it is a long road ahead, it appears that government’s thrust on Atma Nirbhar Bharat through incentives such as PLI (Production Lined Incentives) and efforts to improve ‘ease of doing business’ is bearing fruit.
Monetary Policy Committee (MPC) started its rates increasing cycle in May’22 after an easy monetary policy during Covid. MPC effected one final rate increase in Feb’23 with repo rate reaching 6.5% with continued focus on withdrawal of liquidity. While headline CPI inflation is showing significant volatility, core CPI inflation has come comfortably close to 4%. While the decline in core inflation gives room to reduce repo rate, high and volatile headline inflation ties the hands of the committee.
In a largely anticipated and much awaited move, RBI announced the withdrawal of Rs 2,000 currency notes, brought into service during 2016 demonetization. The move did not cause any disruption in the market because of lower share of notes but also because the high denomination note was largely used as a ‘store of value’ and hardly as a medium of exchange. The move should serve a bigger purpose of reducing black money with greater hassles in carrying large volume of notes. As per RBI, total amount of Rs 2,000 notes in circulation was Rs 3.6 lakh crore, about 10% of total currency in circulation. Still about Rs 10,000 crore of notes have not been deposited, which, if not returned, would be gains for RBI!
The biggest corporate and financial sector development was the merger of HDFC Ltd, an NBFC, and HDFC Bank, effective 1st July’23, more than a year after it was announced on 4th April’22. The merger involved significant regulatory forbearance to smoothen the merger process and help the new entity meet enhanced regulatory requirements. HDFC bank had total assets of close to Rs 25 lakh crore at the end of FY23 whereas HDFC ltd had assets of Rs 7.3 lakh crore.
In terms of international developments, US Fed’s moves continued to dominate the headlines all through the year. The Fed, which raised rates up to 4.5% in 2022, from a level of close to zero, increased it further to 5.5% by Jul’23 which stays there. As a result of Fed’s action and improved supply chain, inflation, which peaked at 9.1% in June’22, has come down to 3.1% by Nov’23. A rather pleasant surprise for the Fed and US government was that GDP did not perform as bad as was feared. For quarter ended Sept’23, GDP recorded growth at annual rate of 4.9%. Even the unemployment rate did not increase so much as to cause any significant unease. Amidst all the fears of ‘hard landing’, US economy seems to have given the runway a miss and started flying again! All bets are now on when the Fed would cut rate as it has indicated its readiness to do so as and when the conditions are suitable.
Not just US, most other countries particularly the advanced economies, also continued their monetary tightening to combat high inflation. Bank of England raised rates from 3.5% in Dec’22 to 5.25% by Aug’23 which stays there. UK inflation, which peaked at 11.1% in Oct’22, has come down to 4.2% by Nov’23. Unlike USA, UK appears close to a hard landing with decline in GDP of 0.1% in Sept’23 quarter after remaining stagnant in Q2 and marginal growth of 0.2% in Q1. To make matters worse, core CPI still remains high at 5.7% (Oct’23) giving little room to Bank of England. European Union face nearly the same dilemma.
China’s economy faced unique challenges during the year including, unlike western countries, a low inflation rate which raised the risk of stagflation. From a peak of 2.8% in Sept’22, inflation has declined to -0.2% in Oc’23 and further to -0.5% in Nov’23. The year started with build-up of stress in real estate sector with a few major real estate companies on the verge of defaulting as a result of dwindling sales and high debt burden. Chinese local government also faces heavy debt burden and are finding it difficult to service their debt with decline in tax mobilization. While GDP grew by 5.2% in Sept’23 quarter, it is modest for an economy used to grow at 8%+ rate. China appears close to where Japan was in early 1990s.
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