By K R Sudhaman
The global economy is facing unprecedented economic challenges driven by high inflation in practically all major economies and there are fears that this could lead to stagflation as recessionary trends are witnessed in advanced economies and slowing China. The question that is often asked now is Indian economy insulated from these economic shocks with GDP growth looking up after signs of good post covid recovery.
The answer is certainly Yes and No. The macro-economic fundamentals are still strong barring surging inflation but there are warning signals. India may still be the fastest growing economies with comfortable foreign exchange reserves and record exports but rising prices particularly global commodity prices driven by crude oil prices at $ 110 a barrel and coal does not give enough cushion to navigate through the difficult global economic situation without some pain.
The prolonged Russian-Ukraine war coupled with unprecedented inflation in United States and Europe has put speed breakers on India’s high economic growth with several global agencies revising downwards India’s GDP projections even though it remains still the fastest growing economies. But the good thing is that downward growth projections is not drastic as in China where GDP forecast is virtually halved to around 4 per cent from the earlier 8 per cent this year. India’s GDP growth is projected around 8 per cent compared to over 9 per cent previously.
The high inflation has come at a time when India was hastening its post covid recovery and Reserve bank of India was forced to do some balancing act between growth and inflation in its monetary policies in the early part of this year. But ultimately the central bank was left with no option but to rise short-term rates by 40 basis points in its recent monetary policy. Going forward it would have to increase interest rates further by at least 1 to 1.5 per cent, economists say in the face of none too comfortable global situation.
With supply constraints coupled with falling demand, there are fears of this getting converted into stagflation. The recessionary trend in advanced economies do not augur well for India. But there are some hopes as several foreign companies have started exiting China in the face of rising labour cost and are scouting for a second global manufacturing hub to deal with supply disruptions. India is well poised to attract sizeable foreign investments in this regard. But India faced infrastructure bottlenecks and none too comfortable business environment which needed to be fixed.
With government laying emphasis on infrastructure development targeting $1 trillion investment in the next five years and stepping up of public investments in the general budget in the last few years have helped to partially fix the infra bottleneck. However, the problem is structural as labour and farm reforms are not happening that rapidly with political consensus not forthcoming. This is critical to attract investments in a big way. Government needed to work vigorously in this area. The farmers agitation had derailed the reform process and government will have to package these reforms in a manner that is politically acceptable and saleable to agitating farmers. This is partly because government had not taken opposition parties into confidence while formulating its strategies.
The Union Budget this year has a long term vision of Amrita Kaal for India’s farm sector. It has initiated number of schemes for agriculture and food sector ranging from infusion of new technologies such as use of drones in agriculture to bio-fortification of seeds and food fortification to respond to the challenge of high mal nutrition in the country. This will however not happen overnight and required concerted work both at the central and state level given the resistance. According farm expert Ashok Gulati a more rational and prudent policy would demand shifting resources at the margin, from safety nets and subsidies to development expenditure, and rural infrastructure to give a more stable and inclusive growth.
Another area is flight of portfolio investments with recessionary trends in advanced economies. This is also reflected in falling foreign exchange reserves but the situation is still comfortable.
These are difficult times but there are still some hopes If India did some tight rope walk. The World has certainly endured a series of shocks over the past two years: from a global pandemic to a humanitarian catastrophe and subsequent disruptions in energy, food and World economies. The ongoing Davos meet has shown that India still, particularly several states, were able to attract some foreign investments and this had indicated that global recovery required collaboration, within and between sectors and countries.
Two decades of financial turbulence and more than ten years of heavy central bank intervention have been punctuated by the pandemic, high inflation and the current war in Ukraine. The world has moved from one crisis to crisis. As a result most economies have concentrated more on crisis management and sometimes over reacted to crisis resulting in some added problems. It is time that the World economy moved away from crisis management to long-term economic fixing through much needed structural reforms so that World became resilient to economic shocks.
India, learning from the mistakes made during the 2008 global currency meltdown, has for a change not over reacted by announcing unsustainable fiscal and monetary incentives to the emerging situation during the Covid. This has made the economy somewhat resilient. India would certainly not go the Sri Lanka or Pakistan way and the economy will certainly not collapse. There are however roadblocks to growth and hence it would have to tread cautiously and push much needed structural reforms. The recovery is certainly not going to be painless but is on track. Davos has shown that investors are looking up to India and if government pursued infrastructure development and ease of doing business and labour reforms, the economy could come out of the woods and lead the process of global recovery. (IPA Service)