India is slated to be the fastest-growing major economy this year even amid global headwinds, including financial market volatility and sharp monetary tightening.
The country’s chief economic advisor assessed the medium-term growth rate at a robust 6.5 percent to 7 percent, banking on formalisation, balance sheet clean-up and digitalisation. Domestic inflation has come off peaks and an easing of monetary policy tightening may be in store.
India’s long-awaited domestic investment cycle is expected to accelerate once the external shocks of geopolitical conflicts and monetary tightening fade, according to the finance ministry.
The US Federal Reserve’s monetary tightening has strengthened the dollar and led to a weakening of all currencies. Volatility in the movement of the Indian rupee against the dollar has been minimised by calibrated interventions of the Reserve Bank of India in the forex market with the backing of large foreign exchange reserves. India’s forex reserves have grown by virtue of a global perception that continues to see India as very much an investible country.
Meanwhile, the global economic situation appears to be of concern with the Federal Reserve keen on continuing with sharp rate hikes despite recessionary fears. An extended war in Europe is hurting as is China’s zero-Covid policy.
The International Monetary Fund’s top economist, Pierre-Olivier Gourinchas, has warned that “the worst is yet to come and, for many people, 2023 will feel like a recession.”
Let’s look at how India fares compared with the US, the UK, the euro area, China, Japan and Brazil:
Growth is not an issue for the world’s second-most populous country. While the Reserve Bank of India tightened monetary policy this year, the government’s capex push and good outlook for the formal sector bode well for growth.
India’s consumer price inflation has been above the RBI’s tolerance ceiling for 10 months in a row and the central bank has failed its inflation mandate. However, the situation is not as bad as in developed economies, which are used to low, single-digit inflation and are estimated to be higher than India’s. To be sure, the RBI estimates retail inflation will ease to its target of 4 percent over two years.
The softening of global growth has hit India’s merchandise exports hard, leading to their first annual shrinkage in almost two years. The country’s current account deficit is expected to widen to more than 3 percent of gross domestic product, a red flag. For now, the RBI said it has enough forex reserves to handle the situation. The government has also been proactive in taking measures to ease stress on the external account.
Finally, the Indian rupee, despite plumbing to record lows against the dollar this year, is still among the least hard hit currencies of developed market and emerging market peers. The RBI has used its forex reserves deftly to contain volatility in the exchange rate. A top finance ministry official even called for letting the rupee depreciate gradually.
