Prospects for India

India will not remain immune from global headwinds. It must pull itself up on the strength of domestic demand and fiscal support

Earlier this week, the group of seven richest nations, called the G7, met in the Bavarian Alps, hosted by German Chancellor Olaf Scholz, who took charge of his country just six months ago after Angela Merkel’s 16-year run. India was an invitee to the meeting, along with Indonesia, Argentina, Senegal and South Africa.

Though the agenda for the meeting covered many topics, such as food security, health, climate change, terrorism, gender equality and even democracy, clearly the most important worry on everyone’s minds was the war in Ukraine and its impact on the world economy. India is very vulnerable, being dependent on import of energy, mainly crude oil. Oil prices have remained stubbornly high and are not likely to come down. India wants to take advantage of a steep discount being offered by Russia on its oil exports. In doing so, it has earned the ire of the members of G7, who want a complete boycott of Russia in order to put economic pressure on that country to withdraw from Ukraine.

But Germany, and other west European nations are learning the hard way how energy-dependent they are on Russia, whose oil export and particularly gas pipelines have become Europe’s lifeline. Switching to coal-based energy is neither easy nor desirable. In this awkward geopolitical position, some people are questioning the wisdom of the erstwhile, and much venerated leader Angela Merkel, during whose long tenure Germany’s energy embrace of Russia became tighter. Now, Germany has started to ration the supply of gas, causing much hardship to its people.

Apart from energy, even food prices are at a record high, because of the Ukraine conflict. Inflation is also affecting other consumer items and producer inputs. One additional reason for persistent inflation is due to shortages created by the lockdowns in China. During the recent and new outbreak of Covid, possibly a fourth or fifth wave, China adopted a zero-Covid policy, imposing very harsh lockdowns even in big cities like Shanghai. This has caused the ports in China to be clogged by ships bound for the West as they await their consignments.

As a consequence, inflation and shortages in western economies are being blamed on Russia and China for separate reasons. And, of course, neither President Vladimir Putin nor Xi Jinping are invited to the G7 summit. The G7 is determined to show a unified front of all democracies to counter the actions and stance of Russia and China. But putting up this show of unity is not easy. For instance, India wants to have the freedom to import cheaper oil from Russia and will simply not join any call for boycott or blockade. After all, Russia has been a dependable ally in the supply of military hardware, technology and support for several decades. Similarly, India has been conducting several rounds of high-level talks with China (15, and counting) to sort out border disputes, after the bloodshed and deaths in Galwan, Ladakh, in June 2020. Imports from China into India continue to soar, and for the third year in a row, Indo-China trade will grow strongly.

Meanwhile, the global economic outlook continues to become gloomier. The World Bank recently reduced its global growth forecast for this year, from 4.1% to 2.9%. That is a downgrade of 1.2 percentage points, which translates to a lower income of trillions of dollars. Both the US and Europe are expected to go into recession, i.e., decline in GDP for two consecutive quarters.

India’s growth forecast, too, has been reduced by 1-2% by many economists. That translates into reduced national income of about Rs 3-4 lakh crore, and perhaps 5-8 million fewer jobs. India is counting on a vigorous growth in exports for next year, too, to reach closer to $500 billion in merchandise exports. But that would need the world economy to be in better shape than what seems to be the case.

Since most economies are facing very high inflation (40-year high in the US, 30-year high in India for wholesale price index inflation, record high in the UK), most central banks are increasing the interest rates and tightening money supply. This tightening is causing investors, especially those in stock markets, or private equity funding future unicorns and startups, or hedge funds, to become risk-averse. Foreign Portfolio Investors have pulled $40 billion out of India in the past six months. The much-celebrated initial public offering of the Life Insurance Corporation has seen its stock price come down and value erosion of nearly Rs 1.2 lakh crore. Much of this is because of foreign and global investor sentiment. Even the domestic retail investors in India, whose systematic investment plans (SIP) used to pour Rs 10,000-20,000 crore into the stock market every month, are now reducing their participation.

The world is heading to stagflation, and India will not remain immune from its effects. It must pull itself up on the strength of domestic demand and fiscal support. Money supply is getting tightened for now but can provide some relief if inflation eases. A good monsoon is badly needed. As of now, the June rainfall is barely one fourth of the long-term average, i.e., normal monsoon. To add to all this, the political instability in a large, industrialised state like Maharashtra is not helping. Instability means inaction, or even paralysis, in decision-making, since policymakers are distracted in tackling the political situation. Private sector investors in new factories, new businesses, in housing and other consumer industries might prefer to wait and watch.

All this adds to the sluggish growth environment. However, compared to the western economies which are entering a recession, India will have some positive growth but perhaps not as high as needed. That is, of course, small comfort for a developing economy, for job creation and growth, which is imperative. Policymakers have a tough time ahead in the next 6-12 months.

(The writer is a noted economist)

(Syndicate: The Billion Press)