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Published on: Dec. 24, 2022, 6:27 p.m.
Will our economy continue to duck global headwinds?
  • National Infrastructure Pipeline: a key driver of the government’s capex growth

By Rakesh Joshi. Executive Editor, Business India

Recently, many have speculated that Raghuram Rajan, former governor of RBI, is now planning to wear a political hat. The speculation began after Rajan joined Rahul Gandhi in his Bharat Jodo yatra, a thinly-veiled political exercise. Rajan has not denied the possibility yet. But he continues to make news by needling the Modi government. During his recent stay in India, the economist said he believes the country will be lucky, if it achieves 5 per cent growth next year. 

The former governor, in the course of a recorded conversation with the Congress leader, said next year is going to be more difficult than this one. "Of course, this one had a lot of difficulties with the war and all that. Growth is going to slow in the world. People are raising interest rates that bring down growth.”

India's interest rates have also gone up but Indian exports have been slowing quite a bit,” added Rajan. “India's inflation problem is more about commodities’ inflation problem, vegetables' inflation problem. That is also going to be negative for the growth." 

Diverse views

Rajan’s remarks brought forth a raft of responses from the government and the ruling Bharatiya Janata Party. At least one Central minister, Gajendra Singh Shekhawat, recalled that Rajan had erred in his prediction of default in repayment of Mudra scheme, which involved loans of up to Rs10 lakh to small businesses. Indeed, the government continues to stick to its stand that India is the fastest growing economy in the world and has emerged as a strong power. 

“The November export figures have come now and are encouraging,” commented Shekhawat. “If you look at the statistics of the last one month, many countries in the world are facing recession. India has done well in terms of production and exports. Exports increased by 10.79 per cent”. He listed ‘steps taken by PM Modi’, such as Skill India and Start-up India, as key factors.

Through improvements in ease of doing business, “an atmosphere of security and stability was created, which increased foreign investment. Even critics of India believe that, given the speed with which the economy is growing, it is estimated that, by 2027, India will become the third largest economy in the world,” he added.

Inflation the bugbear

Interestingly while the government is bullish about the economy, the RBI is wary of what the immediate future holds. “Inflation may be slightly down, but it is certainly not out,” the RBI said in its latest ‘State of the Economy’ report. “If anything, it has broadened and become stubborn, especially at its core. And an ‘unease’ hangs over energy prices.”

The report cautioned that the balance of risks is increasingly tilted towards a darkening global outlook and emerging market economies appear to be more vulnerable. Yet, the RBI projects a 6.9 per cent growth for the current fiscal.

In its latest India Development Update, the World Bank’s flagship publication says that India has demonstrated remarkable resilience despite a challenging external environment. The report titled Navigating the Storm, finds that the impact of a tightening global monetary policy cycle, slowing global growth and elevated commodity prices will mean that the economy will experience lower growth in 2022-23, compared to 2021-22. The World Bank has pegged its latest forecast on growth at 6.9 per cent.

The Bank report, however, forecasts that the economy will grow at a rate of 6.6 per cent in 2023-24. While the deteriorating external environment will weigh on India’s growth prospects, the economy is relatively well- positioned to weather global spill-overs, compared to most other emerging markets, it says.

  • Rajan: next year is going to be more difficult than this one

Asian Development Bank (ADB) has kept its outlook for India's economic growth unchanged for the ongoing fiscal year at 7 per cent. For 2023-24, the GDP growth has been kept unchanged at 7.2 per cent. Compared to Rajan’s assessment, these are heart-warming estimates.

Below potential growth

However, Goldman Sachs, the Wall Street brokerage firm, in its India 2023 outlook report says that economic growth in 2023 is expected to slow to 5.9 per cent. “Growth will likely be a tale of two halves, with a slower first half as the reopening boost fades, and monetary tightening weighs on domestic demand. In the second half, growth is likely to re-accelerate as global growth recovers, drag from net exports diminishes and investment cycle picks up,” Goldman Sachs said.

Sajid Chinoy, Chief India Economist, JP Morgan, comes close to Rajan’s assessment when he writes in The Indian Express that the impact of the pandemic and the war has meant that emerging markets are a sizeable 4-5 per cent below their pre-pandemic potential path (versus 1 per cent for the developed markets). “And, this is before the sharp slowing of global growth in 2023 that we must brace for. Even in a relatively soft-landing scenario, global growth is expected to slow to 1.7 per cent from 3 per cent this year. The implications for growth, jobs and livelihood in emerging markets are ominous.”

Such starkly diverse assessments make an assessment of the state of our economy – and a prediction about things to come – difficult. It remains to be seen whether the Indian economy, which managed to duck the global headwinds in 2022, will continue doing so in the coming year. Clearly, the economy’s growth expectations in 2023 will be punctuated by global headwinds – mainly a demand slowdown and geopolitical overhangs, as analysts at Kotak Economic Research point out. 

The recent outbreak of Covid in China, Japan, Korea, the US and Brazil, depending how serious the new variant is, is another factor that could affect growth.  

Positives for India

Other economists believe that, while signals like capacity utilisation levels, higher capital spending and de-leveraged balance sheets give strong indications of a revival in the capex cycle, India cannot afford to let down the guard. The revival of the capex cycle is one of the main factors that could shape India’s growth trajectory.

Of the key indicators, capacity utilisation level has already shown an improvement –  at 75 per cent, it has hit a 17-quarter high. Capex spending by the government and listed companies has now hit an all-time high on a trailing 12-month (ttm) basis and, according to analysts at ICICI Securities, it will touch Rs21 lakh crore in the coming financial year.

Two schemes – the National Infrastructure Pipeline (NIP) worth Rs111 lakh crore and the PLI (production-linked incentive) scheme worth Rs2 lakh crore – will be the key drivers of the government’s capex growth, according to another report by Prabhudas Lilladher.

The rural economy is now showing signs of a revival, according to the readings of four key indicators – employment, credit offtake, auto sales and trade. Another key driver of India’s economic growth next year will be a demand uptick. The WB report also argues that India’s economy is relatively insulated from global spill-overs compared to other emerging markets, partly because India has a large domestic market and is relatively less exposed to international trade flows.

The report finds that while a 1 percentage point decline in growth in the US is associated with a 0.4 percentage point decline in India’s growth, the effect is around 1.5 times larger for other emerging economies. Analysis for growth spill-overs from the EU and China also yields similar results.

  • Shekhawat: November export figures are encouraging

It cannot be denied that there are some other solid positives going for India. The economy’s external position has improved considerably over the past decade. The current-account deficit is adequately financed by improving foreign direct investment inflows and a solid cushion of foreign exchange reserves (India has one of the largest holdings of international reserves in the world). The other key factors that underscore the resilience of the economy are robust tax collections and forex reserves crossing the $550 billion mark once again. 

Role of reforms

Policy reforms and regulatory measures, however delayed, have played a key role in developing resilience in the economy. Increased reliance on market borrowings has improved the transparency and credibility of fiscal policy and the government has diversified the investor base for government securities.

The introduction of a formal inflation targeting framework during the past decade was an important step in lending credibility to monetary policy decisions. While there are still some challenges in the financial sector, measures like the introduction of a new Insolvency and Bankruptcy Code and the creation of the new National Reconstruction Co have facilitated an improvement in financial sector metrics over the past five years.

The WB report notes that both levers of macroeconomic policy – fiscal and monetary – have played a role in managing the challenges that have emerged over the past year. The report notes that the RBI withdrew accommodative monetary policy settings in a measured approach, as it balanced the need to rein in inflation while continuing to support economic growth. 

Fiscal policy supported the central bank’s rate actions by cutting excise duty and other taxes on fuel to moderate the impact of higher global oil prices on inflation. However, the report also cautions that there is a trade-off between trying to limit the adverse impact of global spill-overs on growth and available policy space.

Sajjid Chinoy recently wrote that economies of the world will be beset by a plethora of ‘known unknowns’ and policy makers will have to engage in a high-wired balancing act. He quotes the Fed Chairman Powell that, to succeed, policy will have to be both ‘humble and nimble’.

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