Halfway through 2022-23, the economy’s report card

India’s economy is likely to expand due to policies set in place to cushion the blow. However, while remaining relatively unscathed, India has to work on obstinate, if not systemic, internal challenges and the risk regarding energy security

It’s important to start any commentary on the Indian economy with the acknowledgement that it will likely miss projections put forth around the same time last year. But it is equally important to acknowledge that in April, most experts were convinced that it would be in a far worse position than it is right now. And finally, it is only fair to acknowledge that the country’s economy remains a bright spot globally. As we near the halfway mark of 2022-23, there is merit in looking at each of these aspects in detail.

If food security has worked to India’s advantage, then energy insecurity could work to its disadvantage, throwing budgetary math out of gear, and reviving inflationary fears.  (Keshav Singh/HT Photo)

It isn’t surprising that rating agencies and economists are revising downward their Gross Domestic Product (GDP) growth forecasts for India in 2022-23. A synthesis of research reports published over the past few months tells Chanakya that India’s economy will most likely expand by anything between 6.5% and 7% this year. The number is significantly lower than projections put forth in September last year — but back then, inflation was not a major concern in western nations (it was beginning to rise already, though). Back then, it did not look like there would be a war in Ukraine. Back then, it looked like China would overcome Covid and integrate with the global economy. And back then, the crippling heatwave that affected India’s spring-summer wheat harvest didn’t figure even in extended weather forecasts.

We know how each of these has played out since. On September 16, a study by the World Bank warned of a global recession in 2023. In a statement, the bank said the result could be “a string of financial crises in emerging markets and developing economies that would do them lasting harm.” It went on to add: “The world’s three largest economies — the United States, China, and the euro area — have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.”

How did we get here? The bank’s release mentions “supply disruptions” and “labour market pressure”, and the provenance of both can be traced back to the pandemic, and, more recently, Russia’s invasion of Ukraine. It also mentions “inflation”, which can be attributed to the two factors listed above and, more significantly, to the pandemic response of most western countries — easy money. With central banks around the world (including the Reserve Bank of India) raising rates to combat inflation — and with there being a high likelihood of them meeting with only a limited success given that monetary policy approaches inflation from the demand-side, not the supply-side — there is certain to be a slowing down of the global economy. India’s economy will not be entirely insulated from this. Indeed, the impact is already being seen in one of the bright spots of the Indian economy in 2021-22, exports.

Why do many people think India will get away relatively unscathed? The key word in that question is relatively, because there is no doubt that India will be affected, but there are multiple reasons why many of these extraneous factors will not affect India significantly. This is already evident in data and estimates. For instance, inflation seems to have peaked — and recent wholesale inflation numbers suggest not merely a slowing in growth rates, but an actual dip in prices. And a Reserve Bank of India bulletin released on Friday indicates that India’s current account deficit in 2022-23 could stay around 3% — obviating the possibility (and probability) of trouble in what is called the external sector of the economy. Private consumption, RBI said in August, appeared to be reviving. The central bank’s Friday bulletin speaks of “portfolio flows returning and foreign direct investment remaining strong.” A clutch of favourable trade deals — with more in the pipeline — may help the cause of exports in what promises to be a turbulent period for global trade. And, most importantly, the government is continuing with its investment drive, spending on capital assets.

In an analysis in HT, economist Rahul Bajoria listed India’s food security (global food prices have soared); the fact that it isn’t yet strongly connected to the global manufacturing engine (always seen as a weakness, this has now emerged as a strength); and the relatively clean balance sheets of the government and banks and financial institutions as reasons why the Indian economy is doing well. India finds itself here largely on account of its policies and, as is always the case with all things connected to the economy, some measure of luck (but as Louis Pasteur once said, “chance favours only the prepared mind.”)

To be sure, there are risks — including the one posed by energy prices. If food security has worked to India’s advantage, then energy insecurity could work to its disadvantage, throwing budgetary math out of gear, and reviving inflationary fears. Still, in balance, India has negotiated a particularly treacherous period for the global economy — a more treacherous one is to follow — a lot better than many richer countries.

The pressing economic challenges for India, then, remain internal. For economic policymakers, this is good news because it means the issues are within their direct control. But it is also bad news because many of the challenges are not new — and therefore, obstinate, if not systemic. The competitiveness and financial health of India’s small businesses is one. Preserving (and strengthening), the fraying fiscal federal compact with the states is another. And improving the lot of the country’s poor — as analysts, bureaucrats, and some ministers have pointed out, the enhanced free grains scheme the government announced after the pandemic has benefited hundreds of millions of households, dulling the impact of inflation — is still another.

Halfway through 2022-23, it is clear that the Indian economy is in a good place. Things could have been better — but they could have also been worse.

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