Indian Economy: 2023 Shifts and 2024 Peeks

India’s Economy in 2023: A Year-End Review

As the year 2023 ended, we reflect on India’s pivotal developments that have positioned its economy for robust growth in 2024.

India's appeal as an investment hub persists due to its vast operations, skilled talent pool, and technological innovation. Let’s look at few indicators which highlight how the year 2023 went by.

GDP Growth:

Beating expectations, India’s real GDP soared by 7.6 percent in the July–September quarter, outpacing forecasts and setting a growth trajectory exceeding 6 percent for 2023 and 2024. This growth projection surpasses that of China, advanced economies, and the world economy.

The Reserve Bank of India projects reaching the $5 trillion mark by 2027, citing advancements in the financial sector and demographic advantages.

Industrial Manufacturing and Infrastructure Growth

The S&P Global India Manufacturing PMI rebounded to 56.0 in November, indicating the 29th consecutive month of expansion.

India's industrial manufacturing sector experienced a surge, attracting major global tech companies like Apple to expand their operations within the country. The manufacturing sector’s contribution to GDP is set to rise to 21 percent by 2025–26, supported by key initiatives like PLI schemes.

Macroeconomic Indicators

Government Initiatives and Investment Climate

The increase in government spending, particularly in infrastructure, surged by 12.4% in the July-September quarter, focusing on critical sectors like roadways, power plants, and affordable housing projects attracting global investors to invest in India. The United Arab Emirates is exploring investments of up to $50 billion in India, its second largest trading partner.

Also, Indian sovereign bonds added to JP Morgan's key indexes signal India's robust growth, drawing international investors amid outpacing economic growth.

Production-Linked Incentives (PLI) and IT Hardware Regulations

The implementation of PLI schemes led to post-pandemic manufacturing growth, notably in electronics, as evidenced by Apple's significant increase in exports from India.

Recently, IPO-bound Ola Electric has become the first Indian electric two-wheeler (e2W) company to become eligible for the government's production-linked incentive (PLI) scheme

China Factors and FDI Inflows

With China facing headwinds from the struggling property sector, India's diversification efforts away from reliance on China in manufacturing investments continue.

Total FDI inflows in the country in FY 22–23 were $70.97 Bn and total FDI equity inflows stood at $46.03 Bn. Mauritius (24%), Singapore (23%), the USA (9%), the Netherlands (7%), and Japan (6%) emerge as the top 5 countries for FDI equity inflows into India in FY 2022–23.

India sets its sights on significant service export growth, targeting $1 trillion in service exports by 2030.

Finance and Technology in 2023

The fintech sector witnessed various trends and transformations in 2023, reflecting a promising future for financial technology within India.

Regulatory Updates

RBI's Renewed Interest in Unsecured Lending

RBI has increased the risk weight on unsecured lending by 25 percentage points to 125% for all commercial banks and NBFCs. The move comes amidst staggering statistics revealing a 23% growth in unsecured credit over the past couple of years, surpassing the growth of other lending categories at 12–14%.

UPI Transaction Charges

The guidelines on UPI transaction fees of up to 1.1% are applicable to merchants accepting payments above Rs. 2,000 using PPIs, such as mobile wallets. Individuals making personal transactions using UPI are not charged any fees. Thus, UPI payments of any amount for personal transactions are free.

GST on Online Gaming

Goods and Services Tax (GST) Council imposed a 28% tax on online gaming bets, drawing criticism from investors and gaming firms; the Supreme Court declined to halt the Centre's show-cause notices for pending taxes exceeding Rs 1 trillion.

New Innovations

• Credit Line on UPI: NPCI's initiative transforms UPI into a credit ecosystem, enabling seamless digital lending within UPI apps, aiming for Rs. 10,000 crore monthly transactions, and expanding profitability.
• UPI-ATM for QR-Based Cash Withdrawal: NPCI's innovative UPI-ATM service allows cardless ATM withdrawals via smartphones, potentially impacting the debit card market and enhancing transaction convenience and security.
• UPI AutoPay on QR for Recurring Payments: Merchants can streamline recurring payments using UPI AutoPay on QR, facilitating easy activation of services through QR code scanning for a better customer experience.
• Aadhaar-based onboarding on UPI 123 Pay: NPCI's extension of Aadhaar-based onboarding to UPI 123PAY empowers feature phone users to create UPI IDs using Aadhaar card numbers, enabling direct payments from bank accounts.
• Conversational Payment with IOT Devices: Collaboration between NPCI and Amazon Alexa introduces voice-command-based peer-to-peer money transfers, simplifying transactions and real-time balance inquiries through Alexa and smartphone UPI Apps.
• UPI LITE X and Tap & Pay: RBI's UPI LITE X revolutionizes offline payments, facilitating transactions without an internet connection. UPI Tap & Pay allows NFC-enabled QR code payments, enhancing convenience in digital transactions.
• Improved Face Authentication by UIDAI: UIDAI introduces advanced face authentication powered by AI and ML, aiming to provide seamless Aadhaar services and reimagine Aadhaar authentication.

Fintech Funding Trends:

In the realm of fintech, Q2 2023 reported a total funding of over $896 million, highlighting more than 39 deals with an average ticket size of $27 million. Although there was a decrease of 42% in funding deals, the average ticket size's 9% increase indicates a shift in investment patterns. Impressively, Indian fintech startups have collectively raised over $27 billion since 2014, showcasing remarkable growth and substantial investment in the sector.

Market Revolution and Opportunities:

Looking ahead, forecasts predict a staggering $2.1 trillion market by 2030 within the Indian fintech sector, with lending technology identified as the most lucrative segment. These projections underscore the vast potential and abundant opportunities within the fintech space.

India’s Outlook for 2024-25

The economic outlook for India in 2024-25 remains optimistic, with estimated growth rates of 6.5%, and a projected 7% growth in 2026, surpassing China's anticipated growth. Notably, S&P Global forecasts India to ascend as the world's third-largest economy by 2027, overtaking Japan and Germany, with a GDP that exceeds US$5 trillion.

Macroeconomic Fundamentals and Demographics:

India's robust economic trajectory finds substantial support in resilient growth dynamics and favorable demographics. With the world's largest young population and a median age of 28.2 years, India foresees a resurgence in domestic demand, particularly in private consumption and household spending post-pandemic.

Key Sectors for Foreign Investment:

Several sectors in India, including healthcare, insurance, and fintech, have witnessed substantial growth, primarily due to relaxed FDI policies and targeted industry-specific incentives. Additionally, the surge in investments within renewable energy, electric vehicles, IT, and services has garnered attention, contributing significantly to the country's economic landscape.

Real Estate, Infrastructure, and Technology:

Projections indicate positive growth in Mumbai's prime residential prices and substantial office space supply across India. The Indian IT industry, striving to achieve US$350 billion in revenues by 2030, is expected to contribute 8% to the GDP, emphasizing innovation and emerging technologies like AI, machine learning, and blockchain.

Emerging Industries and Sustainability:

Industries such as battery energy storage, green hydrogen, biotechnology, AVGC (Animation, Visual Effects, Gaming, and Comics), semiconductor chip manufacturing, and green tech are poised for investment-led growth. The emphasis on sustainability, ESG (Environmental, Social, and Governance), and decarbonization initiatives is not just influencing hiring decisions but also adding new employment opportunities.

Election Year Dynamics:

The forthcoming 2024 general elections in India are predicted to bring a shift in the drivers of economic growth, with an expectation of stable and resilient growth, despite challenges like elevated inflation due to food and oil supply shocks.

According to Goldman Sachs Research, India anticipates a 6.2% growth rate in 2024, the highest among 13 large economies.

Indian Fintech’s Future Outlook in 2024

Fintech Market Overview:

India's fintech market continues its rapid ascent, emerging as the world's fastest-growing sector, with over 2,100 fintech entities established in the last five years. The sector's current market valuation stands at a noteworthy US$31 billion, projected to escalate to US$84 billion by 2025. The entire industry valuation is estimated to range between US$50-60 billion, anticipated to surge to an impressive US$150-160 billion by 2025.

Investment Trends:

Despite challenges posed by the pandemic, fintech investments soared by 60% to reach US$1,467 million in the first half of 2020 compared to the previous year. India witnessed the emergence of three new unicorns and five 'soonicorns' in the fintech domain since January 2020, showcasing the resilience and potential of this sector.

Fintech Ecosystem:

Indian fintech encompasses various segments, including payments, lending, wealth technology (WealthTech), insurance technology (InsureTech), and regulation technology (RegTech). This diverse landscape has spurred rapid innovation aimed at enhancing financial services' accessibility and reducing information asymmetry.

Investment Landscape and Trends:

Fintech software-as-a-service (SaaS) and InsurTech entities experienced significant growth, attracting investments of US$145 million and US$215 million, respectively, in 2020. Cumulative investments in domestic fintech entities have exceeded US$10 billion since 2016, showcasing substantial investor confidence and interest in this sector.

Key Growth Drivers and Trends:

Government-led initiatives such as Start-up India, Aadhaar, Jan Dhan Aadhaar, and India Stack have been instrumental in bolstering the fintech ecosystem, fostering financial inclusion, and driving innovation. The blockchain market, projected to grow at a Compound Annual Growth Rate (CAGR) of 37% till 2024, is expected to play a crucial role in advancing fintech capabilities.

Fintech Clusters and Players:

Bengaluru and Mumbai serve as major hubs for fintech entities, capitalizing on their technological and financial expertise. Notable players like Cashfree, CoinDCX, Money Tap, Niyo, and Yap have been at the forefront, pioneering diverse fintech solutions and innovations that continue to redefine the industry landscape.

Advancements in AI and Fintech:

• Personalized Financial Services: AI-powered fintech platforms offered tailored financial solutions, leveraging data analytics and machine learning to recommend suitable financial products and strategies, enhancing users' financial well-being.
• Enhanced Fraud Detection: AI algorithms scrutinized transaction data in real-time, quickly identifying fraudulent activities, bolstering financial security and consumer trust.
• Algorithmic Trading Advancements: AI-driven strategies in trading became more sophisticated, utilizing predictive analytics and natural language processing to make faster and informed decisions, improving trading outcomes.
• Risk Assessment and Inclusive Lending: AI-driven risk assessment models refined credit scoring by analyzing diverse data sources, expanding access to credit for underserved populations, promoting financial inclusion.

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As the nation gears up for the next phase of economic expansion, navigating through evolving trends, policy changes, and technological advancements remains pivotal for stakeholders and investors eyeing India's thriving economic landscape in 2024 and beyond.