Indian Economy performing better in the changing world
Context:
- Despite growing global threats, the Indian economy seems to have performed very well in the first half of current fiscal year. The governor of the RBI stated last week that the second quarter might surprise to the upside following the first quarter’s robust growth of 7.8%.
Indices that the Indian economy is doing better:
- In contrast to the lacklustre manufacturing PMI internationally, high-frequency statistics, such as the Purchasing Managers Index (PMI) for manufacturing and services, continue to show substantial expansion.
- The demand for public investment is still strong, tax collections are strong, and the financial environment has been favourable.
- India is more resilient because of its well-capitalized banks and robust balance sheets in the private corporate sector.
- The second quarter’s challenges from high food prices and sluggish exports appear to have been countered by the momentum and strengths within the country.
- Also stable has been consumption.
- Around two-thirds of service sector activity in India is concentrated in urban areas.
- The retail credit growth rate is over 18%, while bank credit growth is still robust at over 15%, both of which support consumer spending.
- The temporary surge in food prices during the July–September quarter caused some instability in the inflationary conditions, but they have already subsided.
- The headline consumer price inflation (CPI) has dropped to below the Reserve Bank of India’s comfortable 6-percent threshold thanks to the entry of fresh food supplies into the market and prompt government intervention to curb food price increases.
- Thanks to decreased commodity prices and less strain on the supply chain, non-food inflation has been very mild.
- In September, core inflation, which is determined by deducting fuel and food costs from headline inflation, decreased to 4.5%.
- But the headline CPI is still higher than the 4% target set by the monetary policy committee.
- India’s foreign balance has been comparatively resilient.
- With nearly $580 billion in foreign exchange reserves, the current account deficit is within acceptable bounds.
- The first half of the fiscal year saw India’s strong performance against a backdrop of varied developments in major economies.
- While certain regions of the world, including the US, are seeing a downturn in growth, Europe and China are not.
Indian economy’s relationship to the world economy:
- The interplay of regional and global developments—which might include shocks, structural shifts, and cyclical factors—will influence the future of the economy.
- The near-term forecast is more significantly impacted by cyclical factors including rising interest rates, declining global GDP, and enduring shocks (the most recent of which being the Middle East conflict).
- In the upcoming quarters, these will put the durability of the domestic economy to the test.
- Inflation continues to be the key worry on a global scale and poses a threat to the extension of already high interest rates.
- According to S&P Global, this will lead to below-average growth in the US the following year and the year after.
- This year, Europe is weak and will continue to be weak.
- Data spanning 40 years indicates that increased trade and financial flow integration has caused domestic growth cycles to synchronise with those of developed nations.
- Over the past four years, India’s exports to the US and the European Union (EU) have increased while those to the Asia Pacific area have decreased.
- Increased trade exposure to the US and EU implies that a cyclical recession there will impact the local economy.
- The two geopolitical crises that are currently raging, one in the Middle East and the other between Russia and Ukraine, have the potential to escalate crude oil prices and put pressure on the economy, public finances, growth, and external accounts.
- Although they are still in a solid expansion zone, the manufacturing and services PMIs declined in October.
India’s prospects for medium- to long-term growth:
- Unprecedented structural factors, including changing globalisation, technological upheavals, climate action, and demographic shifts, will impact India’s medium- to long-term economic narrative.
- The potential for global growth is being reduced by shifting globalisation, which includes tariff conflicts and supply-chain diversity, as well as an ageing population.
- A recent World Bank analysis projects that between now and 2030, global growth would drop to a three-decade low of 2.2% annually, from 3.5% in the previous decade and 2.6% between 2011 and 21.
- Although India’s economic cycles are now in sync with those of developed nations, the country’s long-term trend rate of growth continues to take a different course.
- Due to opening up and economic reform, India’s growth has increased while that of advanced countries has been declining since the early 1990s.
- In addition to riding the tailwind from diversifying global supply chains, India can maintain and possibly improve its growth prospects as growth potential across advanced countries slows by developing both digital and physical infrastructure and implementing growth-enhancing reforms to improve ease of doing business.
The Indian economy faces several challenges:
- India is attempting to use manufacturing and infrastructure, two industries with high carbon emissions, as its main growth drivers. Action relating to climate change will consequently present a special challenge.
- Making expansion labor-intensive while enhancing women’s participation is the second difficulty.
- In summary, India’s growth rate may be maintained at roughly 6.7% annually through the end of this decade, which is marginally higher than the 6.6% annual growth rate recorded in the decade before to the pandemic. As a result, India’s economy will grow to $6.7 trillion and reach middle-income levels by 2030–31.
