Global sluggishness to affect India on the margin

The sluggishness in global growth will have a very limited impact on the Indian economy and its markets.

Global economic scenario is changing, and what will be the impact on the Indian economy and markets is the key question. Growth is slowing across most geographies and inflation, particularly core inflation, continues to remain both elevated and persistent. A restrictive monetary policy has led to higher interest rates and a squeeze on aggregate demand. Interestingly labour markets continue to remain tight in the advanced economies. This, along with a steady increase in service sector prices, has contributed to the persistence of inflation in the G7 countries. Occasional spikes in food and energy prices on account of developments on the Ukraine front and reduction in crude production by Saudi Arabia and Russia have exacerbated the price escalation issue. Higher interest rates have adversely affected new investment, mortgages and the capital replacement process.

Multilateral agencies like the World Bank, International Monetary Fund (IMF) and Organisation for Economic Cooperation and Development (OECD) have their estimates of world GDP, the number differs marginally but the takeaway is somewhat similar. World GDP during 2023 is likely to be contained at 3 percent or less, and in 2024, it could be around 2.7 percent. Out of the current growth, a large chunk (15 percent) is expected to come from India. International trade growth too is expected to remain subdued, its growth is unlikely to cross 1.7 percent in 2023. Uncertainties about demand and lack of strength in the Chinese rebound and geopolitical policy shifts in the G7 countries continue to affect trade growth adversely. Along with these factors, higher risk perception and hardening interest rates have constrained the expansion of FDI. Lower expansion of international merchandise trade and lower FDI will have an impact on India, albeit in a limited way.

Fiscal policy in most countries continues to bear the brunt of overextension during the Covid years, India is a notable exception. The public debt levels in most of the G20 countries, which include both advanced and emerging economies, are inordinately high. This can constrain their respective governments from undertaking additional expenditure. Here again, India is a remarkable exception, government capital expenditure in 2023-24 is expected to go up by 37.4 percent.

Barriers To Trade

On the trade side, globalisation is under threat and domestic economic compulsions have led to fragmentation in world trade. Barriers to trade are springing up and extensive use of non-trade barriers (NTBs) are becoming visible all around. As we transition from a unipolar (USA-dominated) world economy to a multipolar world, the perspective changes. Geopolitical groupings are bearing dominant drivers of international trade, finance and cross-border investments instead of the World Trade Organisation (WTO). Currently, there is a shift in strategy, countries and firms are moving from an efficient global supply chain to a resilient and workable supply chain. The focus is more on re-shoring and friend-shoring to contain risks in supply. The conflict of interest between the G7 countries and China has thrown up opportunities for countries like Mexico, Vietnam and India. The issue for India is how to leverage this opportunity by being more competitive; structural reforms (including financial sector reforms) undertaken during recent years, infrastructural investments, reduction in logistics costs, etc are important in this context. However, state-level reforms need greater focus.

GDP estimations of multilateral agencies like the IMF, World Bank, OECD and RBI indicate 6-6.5 percent GDP growth for India in 2023-24. The bulk of the growth will be spurred by domestic activity. Examining the risk side, India’s share in global manufacturing exports is limited unlike that of China. The challenging outlook for China can make India more attractive to both FDI and FPI.

The risk on the agricultural side due to El Niño is receding, rainfall in September is near normal, and acreages under cultivation of major rainfed crops like paddy, sugarcane and coarse cereals are estimated to be higher than that of 2022. However, pulses and oilseed acreages could suffer marginally due to unevenness in the geographical spread of rainfall. A certain degree of revival is perceptible in the industrial sectors. The core sector which accounts for 40 percent of the index of industrial production (IIP) is growing at a healthy clip. High-frequency indicators of the economy like the purchasing managers’ index (PMI) for production and services are well above the benchmark, and growth in GST e-way bills, railway freights, etc are robust.

Drivers Of Growth

Two key growth drivers of the economy, private consumption expenditure and gross fixed capital formation (investment) are growing at 6 percent and 8 percent, respectively. It is expected that government fixed investment will crowd in private investment with a lag. The context is being made favourable by the plateauing of interest rates and steady upward movement in capacity utilisation. Inflation, both headline and core, is expected to come down, as there is neither demand-side exuberance nor supply-side shortages and fiscal deficit is manageable. Occasional spikes in crude prices due to output reduction, accentuated by a strong dollar, will have to be managed. However, commodity prices can’t be firming up when global demand conditions are sluggish.

Given India’s strong macroeconomic fundamentals, attractive demographics, policy reforms directed at higher competitiveness and appropriate geo-political positioning in G20, the country will continue to remain attractive for both FDI and FPI. We have discussed FDI issues earlier, for FPIs, in the short-term, relative earnings growth and relative valuations are important vis-a-vis other emerging economies. While Indian markets continue to remain attractive in terms of dollar-denominated compounded earnings, price-earning (P/E) ratios are often higher than in other Asian countries, making the market overvalued. Secondly, asset preference occasionally tilts in favour of bonds, that too can affect the equity market adversely. These dips have a short duration, they have not affected the long-term trend growth in the equity prices index deleteriously.

On the whole, it appears, that the sluggishness in global growth will have a very limited impact on the Indian economy and its markets. However, this is not to suggest that India is immune to any global crisis and the economy is completely decoupled. The country can be expected to continue on a robust growth trajectory even when many G20 countries are faced with growth issues.

Siddhartha Roy is the former Economic Advisor of the Tata Group. Views are personal, and do not represent the stand of this publication.