Number theory | In times of uncertainty, how resilient is India’s economy to global economic turmoil?

With central banks across the world raising interest rates to contain inflation – there is still a debate over how effective raising rates is to overcome supply-side inflation – growth rates are expected to suffer yet another blow.

Barely a couple of years after the Covid-19 pandemic disrupted the global economy, the world is looking at widespread economic turbulence once again. Inflation rates continue to be much higher than historic levels, not necessarily a result of what economists describe as overheating but due to supply chain disruptions on account of first the pandemic and then the ongoing Russia-Ukraine war. Most experts believe that things could get worse due to gas shortage in winter, especially in Europe. A rise

How resilient is the Indian economy to the forthcoming global economic winter? (Pradeep Gaur/Mint)

Will a global slowdown hurt India’s growth?

It will, via two routes. Exports played an important part in the post-pandemic recovery and with global growth, especially in advanced economies, coming down, India’s export earnings are bound to face headwinds. In fact, this process has already started, as can be seen in the monthly export and import data. “Exports have been a major driver of India’s post-pandemic recovery, but are slowing with weakness in global growth. Mid- and low-tech exports have been slowing since June. High-tech goods export volumes showed their first signs of slowing in August”, a research note dated September 26 by Pranjul Bhandari and Aayushi Chaudhury from HSBC research points out. The other way in which a global recession will adversely affect India’s growth story is a dampening of business confidence due to increased global uncertainty. This does not bode well for the revival of the private cap-ex cycle. Still, the fact that India is not as linked to the global economy, especially manufacturing supply chains, as some other countries (including South East Asian tigers) could prove a redeeming factor.

Will moderation in global commodity prices, especially oil, help?

It will, When the finance ministry released its Economic Survey before the Budget on January 31, 2022, it envisaged average crude oil prices for the fiscal year 2022-23 at $85 per barrel. This assumption seemed to be very far from reality after Russian invaded Ukraine on February 24. Crude oil prices peaked at more than $120 per barrel in the month of June. Given the fact that India imports more than 80% of its energy requirements, higher crude prices are a triple whammy as they have an adverse impact on inflation, trade balance and the fiscal situation. The only upside which the current recessionary environment has brought for the Indian economy is the moderation in energy prices due to prospects of a fall in demand. In fact, crude prices have actually come below the $85 per barrel mark in the last couple of days. While most experts do not see prices crashing to much lower levels anytime soon, and the rupee’s depreciation has neutralised the fall in energy prices to some extent, policy makers have a much needed cushion in terms of cheaper energy prices as they work to ensure a soft landing for the Indian economy in what is an extremely turbulent global environment.