Global Economy Losing The Pulse — India Will Suffer Setback Not Much As Western Nations

In a highly integrated global economy, the aggressive step of one nation ought to have consequences on many other countries, especially in developing nations such as India and crisis-hit regions like Pakistan and Sri Lanka. 

The global economy, which was already plunged into darkness due to the Covid-19 pandemic, faced another blow when Russian President Vladimir Putin invaded Ukraine early this year. Now, as per the early estimates, the world is heading towards a possible recession amid the economic slowdown. 

As rich nations like America and Britain are struggling to tame inflation, the Federal Reserve of the United States (US) and the Bank of England earlier in November hiked their key short-term interest rates by 75 basis points (0.75 per cent). 

Currently, many western nations are putting their best foot forward to fix their economies. However, the sharp majors in rich countries are already having a negative impact on the Indian economy. Since the beginning of the year, the Indian rupee has depreciated sharply while the US dollar has strengthened significantly. 

The Fed's action of tightening liquidity and rate hike in the US has strengthened the US dollar. It has become a safe haven asset to hold in the present uncertain times of geopolitical instability, elevated energy prices and global growth concerns.   

“The global economy is witnessing one of the most synchronous episodes of monetary policy tightening of the past half century to combat inflation, deteriorating growth outlook and fears of recession. Strengthening of the dollar has led to capital outflows from emerging economies including India. Further, financial asset prices have fallen, bond yields are increasing with borrowing costs rising to a decadal high," said Arun Singh, Global Chief Economist, Dun & Bradstreet India.

Singh also said that challenges to businesses thus remain high— businesses face margin pressures from rising input and borrowing costs. India too will face the heat of a slowdown in the global economy. A sharp depreciation in the rupee, imported inflationary pressures and a widening of the current account deficit are expected to impact growth in FY23.

Coming back to American currency, a stronger dollar exerts a negative impact on emerging market (EM) currencies through the export and import trade route. To meet their import needs, EMs spend money in dollars which has become scarce and expensive. A strong USD exerts a knock-on effect on EM currencies including the Indian rupee. 

"A weaker rupee makes our imports more expensive, and imports are necessary for our country. To meet our consumption needs of crude oil, edible oil, fertiliser, gold and so on, we are dependent on imports. So, in a manner of speaking India's inflation is largely imported," said Anant Singhania, President, IMC Chamber of Commerce and Industry. 

Singhania added that while interest rate hikes may be necessary to tame inflation, such hikes need to be moderated. If not moderated, rate hikes can potentially and possibly inevitably, result in a slowdown of economic activity as funds become expensive.

Indranil Pan, Chief Economist, Yes Bank told BW Businessworld that India is not yet close to the end of the inflation hiking cycle, even as the US Fed appears ready to transit to a slower pace of increase but with no consensus on the terminal rate. 

"Though a significant proportion of India’s GDP is domestically driven, global growth slowdown will impact India negatively through the export channel. It is mostly common knowledge that global income levels are a bigger determinant of India’s export volumes than the Indian rupee," Pan added. 

Also, the Reserve Bank of India (RBI) also faced levels of inflation higher than the upper threshold level of 6 per cent and has reacted by raising repo rates by 190. According to estimates, RBI will be close to pausing— either in December 2022 or latest in February 2023. However, India's inflation still remains to be above 6 per cent 

Notably, foreign flows into India have declined sharply due to the low-interest rate differential of around 200-250 bps between India and the US. It is not enough to even account for a standard 3.5 per cent annual average depreciation of the Indian currency against the USD. 

International agencies and India— 

Several international agencies are slashing India's growth. S&P Global Ratings slashed India's gross domestic product (GDP) growth forecast for the financial year (FY) 2023 by 30 bps to 7 per cent. 

Earlier, the American credit rating agency estimated India's economic growth at 7.3 per cent in the current fiscal with downside risks. 

Even Deloitte India in a report said that the country is to post a 6.5 to 7.1 per cent growth during the financial year (FY) 2022–23. 

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said, "The external environment affects all ‘open’ economies. India’s biggest exposure to the recession will be through the trade channel. Though India’s exports account only for around 11-12 per cent of GDP, on average, lower exports will, nevertheless, be a drag on growth." 

Rakshit added that we expect the FY2023 GDP growth at around 6.8 per cent and for FY2024 at around 6 per cent. The concern, however, is the duration of the expected global slowdown and the depth of the recession in the US, UK, and Europe. 

Additionally, the extent of China’s recovery and its policies towards Covid-19 in CY2023 will also impinge on global demand. 

As several agencies are now pegging India’s GDP closer to 6 per cent for the next financial year, one major question now arises is whether the Prime Minister Narendra Modi-led government will be able to hold up growth as seen in the last couple of years. 

"True, there could be savings on account of food and fertiliser subsidies, but tax collections could also suffer as the advantage of high inflation ends. Mindful of the current high public debt/GDP, there are some indications that the government could be looking at targeting a 50 bps correction in the GFD/GDP ratio, implying limitations towards pushing capital expenditures significantly," said Yes Bank's Pan. 

Bracing for a recession—

According to early estimations, major economies will go into recession as central banks raise interest rates to tame inflation post-Covid-19, now inflamed by high energy prices. 

Talking about whether India will also face the heat of the global recession or not, Singhania said, "The developed world is surely facing the risk of recession. Europe is at the threshold of recession; while economists believe that the US economy may face it. As the Indian economy integrates with the global economy through the trade route and investment route, we cannot remain insulated from global influences."

He added that as an economy whose fundamentals are strong and is in an expansionary phase in its economic journey, India most likely will not face recession but only a slowdown. 

To escape or minimise the impact of the recession, experts told BW Businessworld India needs to enhance consumption to keep the economy moving by capital expenditure. 

India has managed the pandemic and the geopolitical situation really well in terms of policy responses. However, Kotak's Rakshit said that the narrative that the Indian economy is almost immune to external pressures is a stretch. 

He suggested that the policy of targeted interventions through fiscal and monetary policy needs to continue. Focus on public capital expenditure, a relatively light hand on FX intervention and letting the exchange rate absorb some of the external pressure and utilising any gains out of the commodity price channel including crude prices to strengthen the macro fundamentals would be helpful. 

The year of unpredictability: 2023—

As the Russia-Ukraine crisis still continue, the global economy is going to enter into a prolonged period of uncertainty. Experts noted that 2023 is likely to witness slower world growth than 2022 which will dent India’s exports. 

Pan said that the boost that the Indian exports had witnessed in value terms (due to higher global prices) is fading as global commodity prices fall.

"In addition to the near-term uncertainties of recession, interest rate cycle, financial market dislocations, energy prices, etc., the more fundamental shifts that are underway in the world economy will add to the uncertainty and volatility in CY2023," stated Rakshit.

Meanwhile, India continues to offer opportunities for global players of a large domestic market and to partner with her, as India is poised to double its GDP economy from over 3 trillion USD to over 6 trillion USD economy by 2028.