State of the Economy 2022-23 | Indian Economy for UPSC CSE PDF Download

 Page 1


CHAPTER
01
State of the economy 
2022-23: Recove Ry 
complete
In general, global economic shocks in the past were severe but spaced out in time. This 
changed in the third decade of this millennium. At least three shocks have hit the global 
economy since 2020.  It all started with the pandemic-induced contraction of the global 
output, followed by the Russian-Ukraine conflict leading to a worldwide surge in inflation. 
Then, the central banks across economies led by the Federal Reserve responded with 
synchronised policy rate hikes to curb inflation. The rate hike by the US Fed drove capital 
into the US markets causing the US Dollar to appreciate against most currencies. This led 
to the widening of the Current Account Deficits (CAD) and increased inflationary pressures 
in net importing economies. The rate hike and persistent inflation also led to a lowering of 
the global growth forecasts for 2022 and 2023 by the IMF in its October 2022 update of 
the World Economic Outlook.  The frailties of the Chinese economy further contributed to 
weakening the growth forecasts. Slowing global growth apart from monetary tightening 
may also lead to a financial contagion emanating from the advanced economies where the 
debt of the non-financial sector has risen the most since the global financial crisis. With 
inflation persisting in the advanced economies and the central banks hinting at further 
rate hikes, downside risks to the global economic outlook appear elevated.
The Indian economy, however, appears to have moved on after its encounter with the 
pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to 
ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also 
faced the challenge of reining in inflation that the European strife accentuated. Measures 
taken by the government and RBI, along with the easing of global commodity prices, have 
finally managed to bring retail inflation below the RBI upper tolerance target in November 
2022. However, the challenge of the depreciating rupee, although better performing than 
most other currencies, persists with the likelihood of further increases in policy rates by 
the US Fed. The widening of the CAD may also continue as global commodity prices 
remain elevated and the growth momentum of the Indian economy remains strong.  The 
loss of export stimulus is further possible as the slowing world growth and trade shrinks 
the global market size in the second half of the current year. 
Despite these, agencies worldwide continue to project India as the fastest-growing major 
economy at 6.5-7.0 per cent in FY23. These optimistic growth forecasts stem in part 
from the resilience of the Indian economy seen in the rebound of private consumption 
seamlessly replacing the export stimuli as the leading driver of growth.  The uptick in 
private consumption has also given a boost to production activity resulting in an increase 
in capacity utilisation across sectors. The rebound in consumption was engineered by the 
near-universal vaccination coverage overseen by the government that brought people 
Page 2


CHAPTER
01
State of the economy 
2022-23: Recove Ry 
complete
In general, global economic shocks in the past were severe but spaced out in time. This 
changed in the third decade of this millennium. At least three shocks have hit the global 
economy since 2020.  It all started with the pandemic-induced contraction of the global 
output, followed by the Russian-Ukraine conflict leading to a worldwide surge in inflation. 
Then, the central banks across economies led by the Federal Reserve responded with 
synchronised policy rate hikes to curb inflation. The rate hike by the US Fed drove capital 
into the US markets causing the US Dollar to appreciate against most currencies. This led 
to the widening of the Current Account Deficits (CAD) and increased inflationary pressures 
in net importing economies. The rate hike and persistent inflation also led to a lowering of 
the global growth forecasts for 2022 and 2023 by the IMF in its October 2022 update of 
the World Economic Outlook.  The frailties of the Chinese economy further contributed to 
weakening the growth forecasts. Slowing global growth apart from monetary tightening 
may also lead to a financial contagion emanating from the advanced economies where the 
debt of the non-financial sector has risen the most since the global financial crisis. With 
inflation persisting in the advanced economies and the central banks hinting at further 
rate hikes, downside risks to the global economic outlook appear elevated.
The Indian economy, however, appears to have moved on after its encounter with the 
pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to 
ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also 
faced the challenge of reining in inflation that the European strife accentuated. Measures 
taken by the government and RBI, along with the easing of global commodity prices, have 
finally managed to bring retail inflation below the RBI upper tolerance target in November 
2022. However, the challenge of the depreciating rupee, although better performing than 
most other currencies, persists with the likelihood of further increases in policy rates by 
the US Fed. The widening of the CAD may also continue as global commodity prices 
remain elevated and the growth momentum of the Indian economy remains strong.  The 
loss of export stimulus is further possible as the slowing world growth and trade shrinks 
the global market size in the second half of the current year. 
Despite these, agencies worldwide continue to project India as the fastest-growing major 
economy at 6.5-7.0 per cent in FY23. These optimistic growth forecasts stem in part 
from the resilience of the Indian economy seen in the rebound of private consumption 
seamlessly replacing the export stimuli as the leading driver of growth.  The uptick in 
private consumption has also given a boost to production activity resulting in an increase 
in capacity utilisation across sectors. The rebound in consumption was engineered by the 
near-universal vaccination coverage overseen by the government that brought people 
2 Economic Survey 2022-23
back to the streets to spend on contact-based services, such as restaurants, hotels, 
shopping malls, and cinemas, among others. The world’s second-largest vaccination 
drive involving more than 2 billion doses also served to lift consumer sentiments that may 
prolong the rebound in consumption. Vaccinations have facilitated the return of migrant 
workers to cities to work in construction sites as the rebound in consumption spilled over 
into the housing market. This is evident in the housing market witnessing a significant 
decline in inventory overhang to 33 months in Q3 of FY23 from 42 months last year.
The Capital Expenditure (Capex) of the central government, which increased by 63.4 per 
cent in the first eight months of FY23, was another growth driver of the Indian economy 
in the current year, crowding in the private Capex since the January-March quarter of 
2022. On current trend, it appears that the full year’s capital expenditure budget will be 
met. A sustained increase in private Capex is also imminent with the strengthening of the 
balance sheets of the Corporates and the consequent increase in credit financing it has 
been able to generate. A much-improved financial health of well-capitalised public sector 
banks has positioned them better to increase the credit supply. Consequently, the credit 
growth to the Micro, Small, and Medium Enterprises (MSME) sector has been remarkably 
high, over 30.6 per cent, on average during Jan-Nov 2022, supported by the extended 
Emergency Credit Linked Guarantee Scheme (ECLGS) of the Union government. The 
increase in the overall bank credit has also been influenced by the shift in borrower’s 
funding choices from volatile bond markets, where yields have increased, and external 
commercial borrowings, where interest and hedging costs have increased, towards banks.  
If inflation declines in FY24 and if real cost of credit does not rise, then credit growth is 
likely to be brisk in FY24.
India’s economic growth in FY23 has been principally led by private consumption and 
capital formation. It has helped generate employment as seen in the declining urban 
unemployment rate and in the faster net registration in Employee Provident Fund. Still, 
private capex soon needs to take up the leadership role to put job creation on a fast 
track. Recovery of MSMEs is proceeding apace, as is evident in the amounts of Goods 
and Services Tax (GST) they pay, while the Emergency Credit Linked Guarantee Scheme 
(ECGLS) is easing their debt servicing concerns. The Mahatma Gandhi National Rural 
Employment Guarantee Scheme (MGNREGS) has been directly providing jobs in rural 
areas and indirectly creating opportunities for rural households to diversify their sources 
of income generation. Schemes like PM-Kisan and PM Garib Kalyan Yojana have helped 
in ensuring food security in the country, and their impact was also endorsed by the 
United Nations Development Programme (UNDP)
1
. The results of the National Family 
Health Survey (NFHS) also show improvement in rural welfare indicators from FY16 
to FY20, covering aspects like gender, fertility rate, household amenities, and women 
empowerment.
Global growth has been projected to decline in 2023 and is expected to remain generally 
subdued in the following years as well. The slowing demand will likely push down global 
commodity prices and improve India’s CAD in FY24. However, a downside risk to the 
Current Account Balance stems from a swift recovery driven mainly by domestic demand 
1      https://www .undp.or g/publications/addressing-cost-living-crisis-developing-countries-poverty-and-vulnerability-projections-and-policy-
responses
Page 3


CHAPTER
01
State of the economy 
2022-23: Recove Ry 
complete
In general, global economic shocks in the past were severe but spaced out in time. This 
changed in the third decade of this millennium. At least three shocks have hit the global 
economy since 2020.  It all started with the pandemic-induced contraction of the global 
output, followed by the Russian-Ukraine conflict leading to a worldwide surge in inflation. 
Then, the central banks across economies led by the Federal Reserve responded with 
synchronised policy rate hikes to curb inflation. The rate hike by the US Fed drove capital 
into the US markets causing the US Dollar to appreciate against most currencies. This led 
to the widening of the Current Account Deficits (CAD) and increased inflationary pressures 
in net importing economies. The rate hike and persistent inflation also led to a lowering of 
the global growth forecasts for 2022 and 2023 by the IMF in its October 2022 update of 
the World Economic Outlook.  The frailties of the Chinese economy further contributed to 
weakening the growth forecasts. Slowing global growth apart from monetary tightening 
may also lead to a financial contagion emanating from the advanced economies where the 
debt of the non-financial sector has risen the most since the global financial crisis. With 
inflation persisting in the advanced economies and the central banks hinting at further 
rate hikes, downside risks to the global economic outlook appear elevated.
The Indian economy, however, appears to have moved on after its encounter with the 
pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to 
ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also 
faced the challenge of reining in inflation that the European strife accentuated. Measures 
taken by the government and RBI, along with the easing of global commodity prices, have 
finally managed to bring retail inflation below the RBI upper tolerance target in November 
2022. However, the challenge of the depreciating rupee, although better performing than 
most other currencies, persists with the likelihood of further increases in policy rates by 
the US Fed. The widening of the CAD may also continue as global commodity prices 
remain elevated and the growth momentum of the Indian economy remains strong.  The 
loss of export stimulus is further possible as the slowing world growth and trade shrinks 
the global market size in the second half of the current year. 
Despite these, agencies worldwide continue to project India as the fastest-growing major 
economy at 6.5-7.0 per cent in FY23. These optimistic growth forecasts stem in part 
from the resilience of the Indian economy seen in the rebound of private consumption 
seamlessly replacing the export stimuli as the leading driver of growth.  The uptick in 
private consumption has also given a boost to production activity resulting in an increase 
in capacity utilisation across sectors. The rebound in consumption was engineered by the 
near-universal vaccination coverage overseen by the government that brought people 
2 Economic Survey 2022-23
back to the streets to spend on contact-based services, such as restaurants, hotels, 
shopping malls, and cinemas, among others. The world’s second-largest vaccination 
drive involving more than 2 billion doses also served to lift consumer sentiments that may 
prolong the rebound in consumption. Vaccinations have facilitated the return of migrant 
workers to cities to work in construction sites as the rebound in consumption spilled over 
into the housing market. This is evident in the housing market witnessing a significant 
decline in inventory overhang to 33 months in Q3 of FY23 from 42 months last year.
The Capital Expenditure (Capex) of the central government, which increased by 63.4 per 
cent in the first eight months of FY23, was another growth driver of the Indian economy 
in the current year, crowding in the private Capex since the January-March quarter of 
2022. On current trend, it appears that the full year’s capital expenditure budget will be 
met. A sustained increase in private Capex is also imminent with the strengthening of the 
balance sheets of the Corporates and the consequent increase in credit financing it has 
been able to generate. A much-improved financial health of well-capitalised public sector 
banks has positioned them better to increase the credit supply. Consequently, the credit 
growth to the Micro, Small, and Medium Enterprises (MSME) sector has been remarkably 
high, over 30.6 per cent, on average during Jan-Nov 2022, supported by the extended 
Emergency Credit Linked Guarantee Scheme (ECLGS) of the Union government. The 
increase in the overall bank credit has also been influenced by the shift in borrower’s 
funding choices from volatile bond markets, where yields have increased, and external 
commercial borrowings, where interest and hedging costs have increased, towards banks.  
If inflation declines in FY24 and if real cost of credit does not rise, then credit growth is 
likely to be brisk in FY24.
India’s economic growth in FY23 has been principally led by private consumption and 
capital formation. It has helped generate employment as seen in the declining urban 
unemployment rate and in the faster net registration in Employee Provident Fund. Still, 
private capex soon needs to take up the leadership role to put job creation on a fast 
track. Recovery of MSMEs is proceeding apace, as is evident in the amounts of Goods 
and Services Tax (GST) they pay, while the Emergency Credit Linked Guarantee Scheme 
(ECGLS) is easing their debt servicing concerns. The Mahatma Gandhi National Rural 
Employment Guarantee Scheme (MGNREGS) has been directly providing jobs in rural 
areas and indirectly creating opportunities for rural households to diversify their sources 
of income generation. Schemes like PM-Kisan and PM Garib Kalyan Yojana have helped 
in ensuring food security in the country, and their impact was also endorsed by the 
United Nations Development Programme (UNDP)
1
. The results of the National Family 
Health Survey (NFHS) also show improvement in rural welfare indicators from FY16 
to FY20, covering aspects like gender, fertility rate, household amenities, and women 
empowerment.
Global growth has been projected to decline in 2023 and is expected to remain generally 
subdued in the following years as well. The slowing demand will likely push down global 
commodity prices and improve India’s CAD in FY24. However, a downside risk to the 
Current Account Balance stems from a swift recovery driven mainly by domestic demand 
1      https://www .undp.or g/publications/addressing-cost-living-crisis-developing-countries-poverty-and-vulnerability-projections-and-policy-
responses
3 State of the Economy 2022-23: Recovery Complete
and, to a lesser extent, by exports. The CAD needs to be closely monitored as the growth 
momentum of the current year spills over into the next. Growth is expected to be brisk in 
FY24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in 
India with the strengthening of the balance sheets of the corporate and banking sectors. 
Further support to economic growth will come from the expansion of public digital 
platforms and path-breaking measures such as PM GatiShakti, the National Logistics 
Policy, and the Production-Linked Incentive schemes to boost manufacturing output. 
the global economy battles through a unique set of challenges
1.1 In the last century, several events can be recollected that have had an adverse impact on the 
global economy. The two world wars are still vivid in public memory, along with the Spanish flu 
and the great depression. Regional conflicts have been several, as also intermittent oil shocks. 
The previous millennium closed with the East Asian crisis, and the new millennium in its first 
decade opened with the technology bust, followed several years later by the global financial 
crisis. The second decade, apart from minor episodes of the taper tantrum and growing trade 
tensions between the super-powers, had gone relatively incident-free globally, although Europe 
had its moments of stress during the decade. Before the third decade of the new millennium 
commenced, incidents of global economic turbulence were generally spaced out, allowing 
economies breathing time to recover before preparing for the next challenge. 
1.2 The Covid-19 pandemic (‘pandemic’ hereinafter) notified by the WHO in January 2020 
was the first challenge of the third decade that hit global growth. Two years later, as the global 
economy was recovering from the pandemic-induced output contraction, the Russia-Ukraine 
conflict broke out in February 2022, triggering a swing in commodity prices and, thus, accelerating 
existing inflationary pressures. This posed the second challenge. Soon after, the third challenge 
emerged when nations undertook monetary tightening to rein in inflation causing growth to 
weaken. Monetary tightening also drove capital flows to safe-haven US markets, contributed 
to rising sovereign bond yields, and depreciation of most currencies against the US dollar. The 
consequent increase in borrowing costs also stressed high levels of public and private debt, 
threatening the financial system. Faced with the prospects of global stagflation, nations, feeling 
compelled to protect their respective economic space, slowed cross-border trade, which posed 
the fourth challenge to growth.  All along, the fifth challenge was festering as China experienced 
a considerable slowdown induced by its policies. The sixth medium-term challenge to growth 
was seen in the scarring from the pandemic brought in by the loss of education and income-
earning opportunities. A simultaneous occurrence of several challenges to growth is perhaps 
unprecedented.  Like the rest of the world, India, too, faced this extraordinary set of challenges 
but withstood them better than most economies.
1.3 Global economic recovery was well on track until the Russia-Ukraine conflict broke out 
in February 2022. The conflict has now continued for almost a year, disrupting the restoration 
of the supply chains disrupted earlier by lockdowns and limited trade traffic. In the last eleven 
months, the world economy has faced almost as many disruptions as caused by the pandemic 
Page 4


CHAPTER
01
State of the economy 
2022-23: Recove Ry 
complete
In general, global economic shocks in the past were severe but spaced out in time. This 
changed in the third decade of this millennium. At least three shocks have hit the global 
economy since 2020.  It all started with the pandemic-induced contraction of the global 
output, followed by the Russian-Ukraine conflict leading to a worldwide surge in inflation. 
Then, the central banks across economies led by the Federal Reserve responded with 
synchronised policy rate hikes to curb inflation. The rate hike by the US Fed drove capital 
into the US markets causing the US Dollar to appreciate against most currencies. This led 
to the widening of the Current Account Deficits (CAD) and increased inflationary pressures 
in net importing economies. The rate hike and persistent inflation also led to a lowering of 
the global growth forecasts for 2022 and 2023 by the IMF in its October 2022 update of 
the World Economic Outlook.  The frailties of the Chinese economy further contributed to 
weakening the growth forecasts. Slowing global growth apart from monetary tightening 
may also lead to a financial contagion emanating from the advanced economies where the 
debt of the non-financial sector has risen the most since the global financial crisis. With 
inflation persisting in the advanced economies and the central banks hinting at further 
rate hikes, downside risks to the global economic outlook appear elevated.
The Indian economy, however, appears to have moved on after its encounter with the 
pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to 
ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also 
faced the challenge of reining in inflation that the European strife accentuated. Measures 
taken by the government and RBI, along with the easing of global commodity prices, have 
finally managed to bring retail inflation below the RBI upper tolerance target in November 
2022. However, the challenge of the depreciating rupee, although better performing than 
most other currencies, persists with the likelihood of further increases in policy rates by 
the US Fed. The widening of the CAD may also continue as global commodity prices 
remain elevated and the growth momentum of the Indian economy remains strong.  The 
loss of export stimulus is further possible as the slowing world growth and trade shrinks 
the global market size in the second half of the current year. 
Despite these, agencies worldwide continue to project India as the fastest-growing major 
economy at 6.5-7.0 per cent in FY23. These optimistic growth forecasts stem in part 
from the resilience of the Indian economy seen in the rebound of private consumption 
seamlessly replacing the export stimuli as the leading driver of growth.  The uptick in 
private consumption has also given a boost to production activity resulting in an increase 
in capacity utilisation across sectors. The rebound in consumption was engineered by the 
near-universal vaccination coverage overseen by the government that brought people 
2 Economic Survey 2022-23
back to the streets to spend on contact-based services, such as restaurants, hotels, 
shopping malls, and cinemas, among others. The world’s second-largest vaccination 
drive involving more than 2 billion doses also served to lift consumer sentiments that may 
prolong the rebound in consumption. Vaccinations have facilitated the return of migrant 
workers to cities to work in construction sites as the rebound in consumption spilled over 
into the housing market. This is evident in the housing market witnessing a significant 
decline in inventory overhang to 33 months in Q3 of FY23 from 42 months last year.
The Capital Expenditure (Capex) of the central government, which increased by 63.4 per 
cent in the first eight months of FY23, was another growth driver of the Indian economy 
in the current year, crowding in the private Capex since the January-March quarter of 
2022. On current trend, it appears that the full year’s capital expenditure budget will be 
met. A sustained increase in private Capex is also imminent with the strengthening of the 
balance sheets of the Corporates and the consequent increase in credit financing it has 
been able to generate. A much-improved financial health of well-capitalised public sector 
banks has positioned them better to increase the credit supply. Consequently, the credit 
growth to the Micro, Small, and Medium Enterprises (MSME) sector has been remarkably 
high, over 30.6 per cent, on average during Jan-Nov 2022, supported by the extended 
Emergency Credit Linked Guarantee Scheme (ECLGS) of the Union government. The 
increase in the overall bank credit has also been influenced by the shift in borrower’s 
funding choices from volatile bond markets, where yields have increased, and external 
commercial borrowings, where interest and hedging costs have increased, towards banks.  
If inflation declines in FY24 and if real cost of credit does not rise, then credit growth is 
likely to be brisk in FY24.
India’s economic growth in FY23 has been principally led by private consumption and 
capital formation. It has helped generate employment as seen in the declining urban 
unemployment rate and in the faster net registration in Employee Provident Fund. Still, 
private capex soon needs to take up the leadership role to put job creation on a fast 
track. Recovery of MSMEs is proceeding apace, as is evident in the amounts of Goods 
and Services Tax (GST) they pay, while the Emergency Credit Linked Guarantee Scheme 
(ECGLS) is easing their debt servicing concerns. The Mahatma Gandhi National Rural 
Employment Guarantee Scheme (MGNREGS) has been directly providing jobs in rural 
areas and indirectly creating opportunities for rural households to diversify their sources 
of income generation. Schemes like PM-Kisan and PM Garib Kalyan Yojana have helped 
in ensuring food security in the country, and their impact was also endorsed by the 
United Nations Development Programme (UNDP)
1
. The results of the National Family 
Health Survey (NFHS) also show improvement in rural welfare indicators from FY16 
to FY20, covering aspects like gender, fertility rate, household amenities, and women 
empowerment.
Global growth has been projected to decline in 2023 and is expected to remain generally 
subdued in the following years as well. The slowing demand will likely push down global 
commodity prices and improve India’s CAD in FY24. However, a downside risk to the 
Current Account Balance stems from a swift recovery driven mainly by domestic demand 
1      https://www .undp.or g/publications/addressing-cost-living-crisis-developing-countries-poverty-and-vulnerability-projections-and-policy-
responses
3 State of the Economy 2022-23: Recovery Complete
and, to a lesser extent, by exports. The CAD needs to be closely monitored as the growth 
momentum of the current year spills over into the next. Growth is expected to be brisk in 
FY24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in 
India with the strengthening of the balance sheets of the corporate and banking sectors. 
Further support to economic growth will come from the expansion of public digital 
platforms and path-breaking measures such as PM GatiShakti, the National Logistics 
Policy, and the Production-Linked Incentive schemes to boost manufacturing output. 
the global economy battles through a unique set of challenges
1.1 In the last century, several events can be recollected that have had an adverse impact on the 
global economy. The two world wars are still vivid in public memory, along with the Spanish flu 
and the great depression. Regional conflicts have been several, as also intermittent oil shocks. 
The previous millennium closed with the East Asian crisis, and the new millennium in its first 
decade opened with the technology bust, followed several years later by the global financial 
crisis. The second decade, apart from minor episodes of the taper tantrum and growing trade 
tensions between the super-powers, had gone relatively incident-free globally, although Europe 
had its moments of stress during the decade. Before the third decade of the new millennium 
commenced, incidents of global economic turbulence were generally spaced out, allowing 
economies breathing time to recover before preparing for the next challenge. 
1.2 The Covid-19 pandemic (‘pandemic’ hereinafter) notified by the WHO in January 2020 
was the first challenge of the third decade that hit global growth. Two years later, as the global 
economy was recovering from the pandemic-induced output contraction, the Russia-Ukraine 
conflict broke out in February 2022, triggering a swing in commodity prices and, thus, accelerating 
existing inflationary pressures. This posed the second challenge. Soon after, the third challenge 
emerged when nations undertook monetary tightening to rein in inflation causing growth to 
weaken. Monetary tightening also drove capital flows to safe-haven US markets, contributed 
to rising sovereign bond yields, and depreciation of most currencies against the US dollar. The 
consequent increase in borrowing costs also stressed high levels of public and private debt, 
threatening the financial system. Faced with the prospects of global stagflation, nations, feeling 
compelled to protect their respective economic space, slowed cross-border trade, which posed 
the fourth challenge to growth.  All along, the fifth challenge was festering as China experienced 
a considerable slowdown induced by its policies. The sixth medium-term challenge to growth 
was seen in the scarring from the pandemic brought in by the loss of education and income-
earning opportunities. A simultaneous occurrence of several challenges to growth is perhaps 
unprecedented.  Like the rest of the world, India, too, faced this extraordinary set of challenges 
but withstood them better than most economies.
1.3 Global economic recovery was well on track until the Russia-Ukraine conflict broke out 
in February 2022. The conflict has now continued for almost a year, disrupting the restoration 
of the supply chains disrupted earlier by lockdowns and limited trade traffic. In the last eleven 
months, the world economy has faced almost as many disruptions as caused by the pandemic 
4 Economic Survey 2022-23
in two years. The conflict caused the prices of critical commodities such as crude oil, natural 
gas, fertilisers, and wheat to soar. This strengthened the inflationary pressures that the global 
economic recovery had triggered, backed by massive fiscal stimuli and ultra-accommodative 
monetary policies undertaken to limit the output contraction in 2020. Inflation in Advanced 
Economies (AEs), which accounted for most of the global fiscal expansion and monetary easing, 
breached historical highs. Rising commodity prices also led to higher inflation in the Emerging 
Market Economies (EMEs), which otherwise were in the lower inflation zone by virtue of their 
governments undertaking a calibrated fiscal stimulus to address output contraction in 2020. 
figure I.1: Sharp rise in commodity prices due to the 
Russia-Ukraine conflict; prices yet to reach pre-conflict levels 
0
200
400
600
800
1000
0
100
200
300
400
Apr-19
Jun-19
Aug-19
Oct-19
Dec-19
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Index
Index 
All Commodity Base Metals Crude Oil
Food Price Fertiliser Natural Gas Price (RHS)
Coal Price (RHS)
Source: IMF
Inflation stays high, driven by high food and energy prices
figure I.2a: advanced economies figure I.2b: emerging market economies
-4
0
4
8
12
16
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
Euro Area France Germany
UK US Japan
-5
0
5
10
15
20
Feb- 21
A pr-21
Ju n- 21
Au g- 21
O ct-21
De c-21
Feb- 22
A pr-22
Ju n- 22
Au g- 22
O ct-22
De c-22
Per cent
Brazi l Chi na Ind ia
Ind on esi a Mex i co Rus si a
Source: Bloomberg
Page 5


CHAPTER
01
State of the economy 
2022-23: Recove Ry 
complete
In general, global economic shocks in the past were severe but spaced out in time. This 
changed in the third decade of this millennium. At least three shocks have hit the global 
economy since 2020.  It all started with the pandemic-induced contraction of the global 
output, followed by the Russian-Ukraine conflict leading to a worldwide surge in inflation. 
Then, the central banks across economies led by the Federal Reserve responded with 
synchronised policy rate hikes to curb inflation. The rate hike by the US Fed drove capital 
into the US markets causing the US Dollar to appreciate against most currencies. This led 
to the widening of the Current Account Deficits (CAD) and increased inflationary pressures 
in net importing economies. The rate hike and persistent inflation also led to a lowering of 
the global growth forecasts for 2022 and 2023 by the IMF in its October 2022 update of 
the World Economic Outlook.  The frailties of the Chinese economy further contributed to 
weakening the growth forecasts. Slowing global growth apart from monetary tightening 
may also lead to a financial contagion emanating from the advanced economies where the 
debt of the non-financial sector has risen the most since the global financial crisis. With 
inflation persisting in the advanced economies and the central banks hinting at further 
rate hikes, downside risks to the global economic outlook appear elevated.
The Indian economy, however, appears to have moved on after its encounter with the 
pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to 
ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also 
faced the challenge of reining in inflation that the European strife accentuated. Measures 
taken by the government and RBI, along with the easing of global commodity prices, have 
finally managed to bring retail inflation below the RBI upper tolerance target in November 
2022. However, the challenge of the depreciating rupee, although better performing than 
most other currencies, persists with the likelihood of further increases in policy rates by 
the US Fed. The widening of the CAD may also continue as global commodity prices 
remain elevated and the growth momentum of the Indian economy remains strong.  The 
loss of export stimulus is further possible as the slowing world growth and trade shrinks 
the global market size in the second half of the current year. 
Despite these, agencies worldwide continue to project India as the fastest-growing major 
economy at 6.5-7.0 per cent in FY23. These optimistic growth forecasts stem in part 
from the resilience of the Indian economy seen in the rebound of private consumption 
seamlessly replacing the export stimuli as the leading driver of growth.  The uptick in 
private consumption has also given a boost to production activity resulting in an increase 
in capacity utilisation across sectors. The rebound in consumption was engineered by the 
near-universal vaccination coverage overseen by the government that brought people 
2 Economic Survey 2022-23
back to the streets to spend on contact-based services, such as restaurants, hotels, 
shopping malls, and cinemas, among others. The world’s second-largest vaccination 
drive involving more than 2 billion doses also served to lift consumer sentiments that may 
prolong the rebound in consumption. Vaccinations have facilitated the return of migrant 
workers to cities to work in construction sites as the rebound in consumption spilled over 
into the housing market. This is evident in the housing market witnessing a significant 
decline in inventory overhang to 33 months in Q3 of FY23 from 42 months last year.
The Capital Expenditure (Capex) of the central government, which increased by 63.4 per 
cent in the first eight months of FY23, was another growth driver of the Indian economy 
in the current year, crowding in the private Capex since the January-March quarter of 
2022. On current trend, it appears that the full year’s capital expenditure budget will be 
met. A sustained increase in private Capex is also imminent with the strengthening of the 
balance sheets of the Corporates and the consequent increase in credit financing it has 
been able to generate. A much-improved financial health of well-capitalised public sector 
banks has positioned them better to increase the credit supply. Consequently, the credit 
growth to the Micro, Small, and Medium Enterprises (MSME) sector has been remarkably 
high, over 30.6 per cent, on average during Jan-Nov 2022, supported by the extended 
Emergency Credit Linked Guarantee Scheme (ECLGS) of the Union government. The 
increase in the overall bank credit has also been influenced by the shift in borrower’s 
funding choices from volatile bond markets, where yields have increased, and external 
commercial borrowings, where interest and hedging costs have increased, towards banks.  
If inflation declines in FY24 and if real cost of credit does not rise, then credit growth is 
likely to be brisk in FY24.
India’s economic growth in FY23 has been principally led by private consumption and 
capital formation. It has helped generate employment as seen in the declining urban 
unemployment rate and in the faster net registration in Employee Provident Fund. Still, 
private capex soon needs to take up the leadership role to put job creation on a fast 
track. Recovery of MSMEs is proceeding apace, as is evident in the amounts of Goods 
and Services Tax (GST) they pay, while the Emergency Credit Linked Guarantee Scheme 
(ECGLS) is easing their debt servicing concerns. The Mahatma Gandhi National Rural 
Employment Guarantee Scheme (MGNREGS) has been directly providing jobs in rural 
areas and indirectly creating opportunities for rural households to diversify their sources 
of income generation. Schemes like PM-Kisan and PM Garib Kalyan Yojana have helped 
in ensuring food security in the country, and their impact was also endorsed by the 
United Nations Development Programme (UNDP)
1
. The results of the National Family 
Health Survey (NFHS) also show improvement in rural welfare indicators from FY16 
to FY20, covering aspects like gender, fertility rate, household amenities, and women 
empowerment.
Global growth has been projected to decline in 2023 and is expected to remain generally 
subdued in the following years as well. The slowing demand will likely push down global 
commodity prices and improve India’s CAD in FY24. However, a downside risk to the 
Current Account Balance stems from a swift recovery driven mainly by domestic demand 
1      https://www .undp.or g/publications/addressing-cost-living-crisis-developing-countries-poverty-and-vulnerability-projections-and-policy-
responses
3 State of the Economy 2022-23: Recovery Complete
and, to a lesser extent, by exports. The CAD needs to be closely monitored as the growth 
momentum of the current year spills over into the next. Growth is expected to be brisk in 
FY24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in 
India with the strengthening of the balance sheets of the corporate and banking sectors. 
Further support to economic growth will come from the expansion of public digital 
platforms and path-breaking measures such as PM GatiShakti, the National Logistics 
Policy, and the Production-Linked Incentive schemes to boost manufacturing output. 
the global economy battles through a unique set of challenges
1.1 In the last century, several events can be recollected that have had an adverse impact on the 
global economy. The two world wars are still vivid in public memory, along with the Spanish flu 
and the great depression. Regional conflicts have been several, as also intermittent oil shocks. 
The previous millennium closed with the East Asian crisis, and the new millennium in its first 
decade opened with the technology bust, followed several years later by the global financial 
crisis. The second decade, apart from minor episodes of the taper tantrum and growing trade 
tensions between the super-powers, had gone relatively incident-free globally, although Europe 
had its moments of stress during the decade. Before the third decade of the new millennium 
commenced, incidents of global economic turbulence were generally spaced out, allowing 
economies breathing time to recover before preparing for the next challenge. 
1.2 The Covid-19 pandemic (‘pandemic’ hereinafter) notified by the WHO in January 2020 
was the first challenge of the third decade that hit global growth. Two years later, as the global 
economy was recovering from the pandemic-induced output contraction, the Russia-Ukraine 
conflict broke out in February 2022, triggering a swing in commodity prices and, thus, accelerating 
existing inflationary pressures. This posed the second challenge. Soon after, the third challenge 
emerged when nations undertook monetary tightening to rein in inflation causing growth to 
weaken. Monetary tightening also drove capital flows to safe-haven US markets, contributed 
to rising sovereign bond yields, and depreciation of most currencies against the US dollar. The 
consequent increase in borrowing costs also stressed high levels of public and private debt, 
threatening the financial system. Faced with the prospects of global stagflation, nations, feeling 
compelled to protect their respective economic space, slowed cross-border trade, which posed 
the fourth challenge to growth.  All along, the fifth challenge was festering as China experienced 
a considerable slowdown induced by its policies. The sixth medium-term challenge to growth 
was seen in the scarring from the pandemic brought in by the loss of education and income-
earning opportunities. A simultaneous occurrence of several challenges to growth is perhaps 
unprecedented.  Like the rest of the world, India, too, faced this extraordinary set of challenges 
but withstood them better than most economies.
1.3 Global economic recovery was well on track until the Russia-Ukraine conflict broke out 
in February 2022. The conflict has now continued for almost a year, disrupting the restoration 
of the supply chains disrupted earlier by lockdowns and limited trade traffic. In the last eleven 
months, the world economy has faced almost as many disruptions as caused by the pandemic 
4 Economic Survey 2022-23
in two years. The conflict caused the prices of critical commodities such as crude oil, natural 
gas, fertilisers, and wheat to soar. This strengthened the inflationary pressures that the global 
economic recovery had triggered, backed by massive fiscal stimuli and ultra-accommodative 
monetary policies undertaken to limit the output contraction in 2020. Inflation in Advanced 
Economies (AEs), which accounted for most of the global fiscal expansion and monetary easing, 
breached historical highs. Rising commodity prices also led to higher inflation in the Emerging 
Market Economies (EMEs), which otherwise were in the lower inflation zone by virtue of their 
governments undertaking a calibrated fiscal stimulus to address output contraction in 2020. 
figure I.1: Sharp rise in commodity prices due to the 
Russia-Ukraine conflict; prices yet to reach pre-conflict levels 
0
200
400
600
800
1000
0
100
200
300
400
Apr-19
Jun-19
Aug-19
Oct-19
Dec-19
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Index
Index 
All Commodity Base Metals Crude Oil
Food Price Fertiliser Natural Gas Price (RHS)
Coal Price (RHS)
Source: IMF
Inflation stays high, driven by high food and energy prices
figure I.2a: advanced economies figure I.2b: emerging market economies
-4
0
4
8
12
16
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
Euro Area France Germany
UK US Japan
-5
0
5
10
15
20
Feb- 21
A pr-21
Ju n- 21
Au g- 21
O ct-21
De c-21
Feb- 22
A pr-22
Ju n- 22
Au g- 22
O ct-22
De c-22
Per cent
Brazi l Chi na Ind ia
Ind on esi a Mex i co Rus si a
Source: Bloomberg
5 State of the Economy 2022-23: Recovery Complete
1.4 Central banks, which were slow to react to price pressures building up during the nascent 
recovery from the pandemic, regarded them as transient only to realise, belatedly, the necessity 
and the inevitability of a strong monetary policy response. Led by the US Federal Reserve, central 
banks have been hiking policy rates and rolling back liquidity to rein in inflation synchronously. 
The pace of this tightening cycle has been rapid – the Federal Reserve’s pace of rate hikes is 
the quickest since the inflationary episode of the 1970s, with the central bank having raised 
interest rates by 425 basis points since March 2022.  As the impact of monetary policy actions 
is felt with a lag, inflation rates remained stubbornly high during the early phase of the rate hike 
cycle but have begun to decline lately. At the same time, synchronised rate hikes by the central 
banks have not tightened financial conditions sufficiently enough for central banks to end their 
tightening campaign.  
financial conditions tighten
figure I.3a: advanced economies figure I.3b: emerging market economies
94
96
98
100
102
104
Dec - 19
J un- 20
Dec - 20
J un- 21
Dec - 21
J un- 22
Dec - 22
US Ja pan
  
94
96
98
100
102
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
Euro Area UK
90
92
94
96
98
100
102
Dec - 19
J un- 20
Dec - 20
J un- 21
Dec - 21
J un- 22
Dec - 22
B r a zil Me xico
 
92
94
96
98
100
102
104
Dec - 19
J un- 20
Dec - 20
J un- 21
Dec - 21
J un- 22
Dec - 22
I ndone s i a I ndi a
Source: Goldman Sachs, Bloomberg
Note: All Y-axes are indices; Data is retrieved from Goldman Sachs financial condition index
1.5 Inflation and monetary tightening led to a hardening of bond yields across economies and 
resulted in an outflow of equity capital from most of the economies around the world into the 
traditionally safe-haven market of the US. Unlike the past when the capital flight was more out of 
the EMEs given their relatively greater vulnerabilities, or the perception thereof, this time around, 
capital has also flown out from the advanced economies. The capital flight subsequently led to 
the strengthening of the US Dollar against other currencies – the US Dollar index strengthened 
by 16.1 per cent between January and September 2022. The consequent depreciation of other 
currencies has been widening the CAD and increasing inflationary pressures in the net importing 
economies.