India’s economy looks like a champion as the world struggles. But wait, don’t celebrate yet

JIndia’s economy, troubled as it is, looks better than almost any other. Start with the prices. Consumer price inflation in the United States is 8.5%, a 40-year high. In the euro zone, it is 7.5%. These are economies accustomed to inflation below 2% on average. Here in India we can complain about rising petrol and diesel prices and some spectacular price tags on individual food items. Lemon prices, for example, have been reported as high as ~300-350 per kg in some wholesale markets. Understandably, criticism of the Reserve Bank has mounted for not putting more emphasis much earlier on controlling inflation, which is now well above the target range. Still, consumer price inflation in India is moderate, at just under 7%. Compared to the BRICS economies, Brazilian inflation is in double digits at 11.3%, as is Russia’s at 16.7%. Only China has nearly killed the inflation beast, breathing slowly at just 1.5%. (All figures are compiled by The Economist.)

The comparative picture is even better when it comes to economic growth. India leads the forecast for 2022, at 7.2%. China is closest among major economies at 5.5%, while the United States and the Eurozone are understandably lower at 3 and 3.3%, respectively – advanced economies tend to grow more slowly than those labeled “emerging”. Either way, Brazil is stagnating and Russia is headed for serious trouble with a projected 10.1% contraction in gross domestic product (GDP). Japan, for its part, has low inflation with slightly accelerating growth.

The comparative good news for India does not end there. The inflation challenge facing the RBI may be easier to overcome since the moderation required in India is less than in advanced economies. Two other positives in the picture are the outstanding performance in tax collection (achieving one of the highest tax-to-GDP ratios in recent years) and exports. Confidence in the country remains high. The rupiah has been one of the most stable currencies, falling only 1.4% against the dollar over the past 12 months. Apart from the yuan, the only currencies to have appreciated against the dollar belong to the oil-exporting countries: Brazil, Indonesia and Mexico.


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HHow long can good news last in the face of visible headwinds? The rupee could falter if oil prices remain high. More importantly, the 3% economic growth forecast for the United States could turn out to be optimistic. The inverted yield curve (which descends over time rather than upwards) has led market watchers to suggest that the world’s largest economy is headed for recession. The key question is whether the US monetary authority can calibrate interest rate hikes to control inflation without causing a recession which, if it occurs, will affect all economies. If global trade slows, India’s exports will also lose their rebound.

Even without this, the comparative figures spell bad news for the world rather than particularly good news for India. Compared to a quarter ago, all growth forecasts for India have been tempered even though the inflation picture has worsened. Monthly production figures remain modest while surveys show a decline in the business climate. Indeed, the RBI expects growth in the second half of 2022-2023 to not exceed 4.1%, with an acceleration thereafter. Uncertainty is implicit in these forecasts.

There is little the government can do to improve the outlook, given its strained finances, repeated disruptions caused by the pandemic and now by the war in Ukraine. China, which has followed a zero-tolerance approach to Covid, shut down its biggest metropolis, Shanghai. It would be futile to think that there will be no fallout for the economy of this country and even the rest of the world – in some areas where another wave of Covid seems to be building even as war in Ukraine threatens to drag on, and perhaps intensify. So while it’s great that India’s numbers look relatively good, don’t get excited just yet. We live in a troubled world.

By special arrangement with Business Standard


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