Duina Barbaruah
(dwinakashyap@gmail.com)
Rising inflation, price rise and unemployment have hit hard many countries of the world, bringing in their wake economic crises they have had never faced before. United Kingdom's economy has been devastated and it brought down the government headed by Liz Truss within a short span. Several countries of Europe are reeling under the impact of economic crises. Powerful countries like USA are no exception. The Covid pandemic that literally hit the economies of many countries so badly for two years does not seem to have gone away. The Russia-Ukraine war that shows no signs of abating and threatening to snowball into World War-III has added to the litany of woes - political and economic instability.
Against this gloomy global scenario, India's economy has maintained comparative stability, though the cascading effect of inflation and the war in Ukraine has been felt with rise in prices of essentials, cooking gas, adding to rise in cost of living.
The resilience of India's economy has to be acknowledged given the fact that the crises seen world over have not impacted our economy the way it should have, thanks to the slew of economic reforms, fiscal management and discipline taken by the Modi Government at the Centre that have insulated our economy from further external shocks.
The monthly economic review for September that came out with interesting facts at the half-way mark of 2023 financial year is a pointer to the fact that though India has emerged as one of the 'bright spots in an otherwise gloomy global scenario'. The economy faces newer challenges against a soaring dollar and sliding rupee, higher interest rates, and external financing.
Treading cautiously, the Ministry of Finance made an optimistic assessment at the mid-way mark of FY23, called on the country's fiscal and monetary authorities to remain watchful as 'dark clouds of recession gather'. The report states, "The globalized nature of India's economy portends that even as inflationary pressures abate, another challenge to macroeconomic stability will rear its head in the form of external sector pressures."
The US Federal Reserve's aggressive fight against inflation, thereby signalling further interest rate hikes, may lower capital inflows, increase pressure on the rupee to depreciate, and make imports of essential commodities costlier. It is to be noted that an unfavourable global economic outlook is bound to moderate the growth of exports, thus affecting the country's trade balance.
Hemmed in by the challenges confronting the country even as inflationary pressures abate, comes in the Reserve Bank of India's latest weekly report that showed foreign exchange reserves at $528 billion, down from over $642 billion at the end of October last year. Amid all this, the Finance Ministry's report has a silver lining. The report said the country should be able to ward off the challenges and keep the economy growing steadily, banking on the strengths of some key sectors.
"The one big strength that India has compared to other countries is the strength of its balance sheet in the household, corporate, and banking sectors," said the report, estimating India's medium-term growth at 6?. It must be admitted that the stability the country imparts in these turbulent times is noteworthy. And here the RBI and the Government have the wherewithal to steer the economic ship through choppy waters and keep the economy growing at a steady pace.
However, it is of paramount importance to continue with prudent macroeconomic policies in the backdrop of escalating global energy prices and supply chain pressures. The report acknowledges this and flanging of global energy prices and supplies as areas of concern. "Geopolitical conflicts may yet intensify reigniting supply chain pressures that have eased recently. If so, inflation may yet see a resurgence rather than a decline in 2023," the review underlined.
On the one hand, India's retail inflation during the last six months stood at 7.2%, lower than the world inflation of 8?, as reflected by the median inflation of major economies - a good sign. On the other hand, the India rupee (INR) in the same period depreciated by 5.4? against the US dollar (USD), less than the depreciation of 8.9? of six major currencies in the DXY Index.
It is expected that the series of measures taken by the RBI during July this year will help to stabilize the capital flows further and strengthen the INR.
India's growth narrative in the first six months of the current fiscal, coupled with the prudent macroeconomic policies that have served the country well since 2014, in a way ensured uninterrupted thrust the Modi Government provided to its capital expenditure. The capital expenditure until August of FY 2022-2023 stood at 46.8? higher than the corresponding period of the previous year.
The increase marked a decisive shift towards improved quality of spending as the ratio of revenue expenditure to capital outlay fell to 4.5 from 6.4 in the last year. Moreover, the rising capital expenditure levels were also augmented by stronger revenue generation in the wake of improvement in tax compliance, higher corporate profitability, and growing economic activities.
The increasing revenue generation has kept the fiscal deficit until August aligned with its budgeted level, which otherwise could have gone haywire with high capital expenditure, higher fertilizer and food subsidies and excise rate cuts to rein in inflation.
On these parameters, Finance Minister Nirmala Sitharaman describes India's economic performance in the first half of 2022-2023 as 'impressive' compared to the rest of the world. As measured by PMI composite index, the economic activity level was higher for India at 56.7 compared to 51.0 for the world level during April-September 2022.
The Central Government's added and continuous thrust on capital expenditure has pitch-forked broad-based growth by facilitating private sector capital formation. Quantum jump in consumption level has resulted in a more-than-proportionate jump in GST revenues. "A more robust and economic recovery could allow the collections to settle at an elevated level, proving the high revenue productivity of the broad-based consumption," the review noted.
While capital formation and digitalization helped to boost medium-term potential growth rate, learning losses caused by the Covid-19 pandemic-induced shutdowns and rising inflationary levels restrain it.
Despite this, the Modi Government quietly went about facilitating the development of India's digital infrastructure on the edifice of unique national identity, financial inclusion and payments.
Citing the country's digital strength, the report said, "India's public digital infrastructure, after several years of development, appears poised to deliver big time on financial access and formalization for households and smaller businesses in India." The country today without any iota of doubt is relatively better placed than others.
India is now poised to take United Payments Interface (UPI) transactions, the most popular digital payment system in the country, global. The push for a global footprint is primarily driven by geopolitical situation, and the need for establishing an international ecosystem through which risks of financial or geopolitical situation - in which traditional modes of payment channels get disrupted - can be mitigated.
It is evident that a well-capitalized banking system has led to an upswing in credit disbursement to the retail, industry and services segments.
As harvesting and procurement seasons progress, food inflation which remains above the RBI's upper tolerance band due to an uptick in food prices, is however, expected to moderate, thereby contributing to a declining headline retail inflation in the remaining fiscal year.
With the expected real economic growth of 6.8? for the country in 2022-2023 the second highest in G20 and at 6.1? for 2023-2024, the highest in G20, India is poised to be one of the fastest growing economies this year, helped by both Government and private capital investment. Even as International Monetary Fund (IMF) and World Bank have lowered India's GDP forecasts this year to 6.8? from 7.4% and to 6.5% from 7.5%, respectively, they have acknowledged India's strength. The World Bank has stated that India is not as vulnerable to the global economic downturn as other regional economies. IMF has pointed out that India is set to become the world's third largest economy by 2028, with a GDP of around $5.36 trillion, overtaking Japan. The projections estimate that India will catch up with Germany by 2026. The country surpassed UK (economically in the red) in the last quarter to claim the 5th position in the world's largest economies.
Moreover, the global developments in recent times have further bolstered the relative attractiveness of India as an investment destination.
Be that as it may, India that has withstood several litmus tests and is relatively better placed than major economies, after at least half a decade of financial stress followed by the pandemic, will be able to ward off the external conditions as is inherent in the strong fundamentals of the economy, to sustain a growth rate of 6-7% even in a worst-case scenario.