As the fears of an impending global recession have increased with rapid deterioration in global growth prospects, coupled with high inflation and worsening financial conditions, its impact will be felt on India in terms of exports. However, the resilient domestic demand, invigorated investment cycle and structural reforms provide hope in giving impetus to economic growth, a finance ministry report said.
“In a world where monetary tightening has weakened growth prospects, India appears well-placed to grow at a moderately brisk rate in the coming years on account of the priority it accorded macroeconomic stability,” the finance ministry's monthly economic report for October said.
The optimism for India also stems from the private sector – financial and non-financial – that has repaired the balance sheets, making them healthy. The financial system stress in the second decade of the millennium, a consequence of the lending boom witnessed in the first decade-plus, is now behind us.
“Private sector financial and non-financial balance sheets are healthy and incipient signs of a new personal sector capital formation cycle are visible. But, more importantly, when the private sector turned cautious due to its balance sheet stress, the government raised capital expenditure substantially. The other factors include structural reforms such as the introduction of the Goods and Services Tax and the Insolvency and Bankruptcy code; the emergence of an affordable and advanced public digital infrastructure, prudent use of fiscal and monetary resources during the pandemic to provide targeted relief to the needy segments of the population,” the report said.
The finance ministry release said that the India’s food security concerns during the current year have been addressed. “Easing international commodity prices and new Kharif arrival are also set to dampen inflationary pressures in the coming months.”
The ministry is hopeful that hiring by firms is likely to witness an improvement as the private sector continues to benefit from the lifting of the Covid-19 restrictions and vigorous sales volumes experienced during the festive season.
While, India may escape the global recession, the global economy continues to navigate an increasingly turbulent and uncertain environment. Inflation has risen to a multi-decade high in many economies, amid elevated food and energy prices. Retail inflation in the US was significantly above the Federal Reserve’s medium-term target of 2 per cent at 7.7 per cent in October while eurozone inflation soared to a record 9.9 per cent in September 2022.
This persistent high inflation has triggered a monetary tightening cycle that has thus far accelerated sharply. The Federal Reserve has raised the federal funds target rate by a cumulative 375 basis points since January 2022. The European Central Bank (ECB) and the Bank of England (BoE) have implemented cumulative hikes of 200 bps and 250 bps, respectively, since November 2021. However, the People’s Bank of China (PBoC) decreased its prime lending rate as the country’s economic activity struggles to maintain momentum in the face of the government’s Zero Covid policy and a precariously positioned real estate sector.
Alongside tighter financial conditions and a steep fall in consumer confidence, indicators of global economic activity have deteriorated. The global composite PMI output index shrank for the second consecutive month in September, led by weakness in advanced economies (particularly in the euro area), as elevated uncertainty and high energy prices dented confidence. These unfavourable developments have led the IMF to downgrade its outlook on the global economy, revising downward its projections of 2023 growth rates for most economies.
Apart from the economic concerns, major concern for India is also its food security. India’s food system was adversely impacted by the Russia-Ukraine conflict and vagaries of nature. “Domestic prices of some food items have risen in the wake of the rise in international prices. India’s grain availability was impacted by the untimely heat waves and deficiency of the southwest monsoon in the current year. However, export restrictions have ensured that the country's needs are fully met,” the finance ministry release said.
“India’s food security has remained intact. Sharp rise in tractor sales in September and October also point towards improved sentiments and an expected increase in crop area sown.”