By Dr. Samantak Das
The pulse of the economic growth of a country can be gauged through the leading economic indicators like the Consumer Price Index (CPI) commonly known as retail inflation, the Index of Industrial Production (IIP), the Exchange rate, and currency movement. These indicators are closely monitored by the Central Banks, policymakers, Governments, and businesses to forecast future growth prospects. India’s persistently high inflation has been a cause of concern due to its impact across sections of the economy. The trend in IIP also indicates that economic activity in the manufacturing sector is yet to be on a consistent growth path. Also, the Indian Rupee movement against the USD is also putting a lot of pressure on various trade and investment flows.
Consumer Price Index remains above 4% since September 2020
Source: Central Statistics Office
RBI’s efforts to cushion the economy from the effects of the pandemic led to an accommodative monetary policy. Despite an infusion of liquidity through various economic packages and a reduction in policy rate (repo rate) during the pandemic period, inflation witnessed a sharp fall as demand declined due to restrictions on economic activities. The Central Bank’s effort to provide sustained support for the revival of growth led to maintaining a low-interest policy (repo rate). This departure in stance by RBI was necessary to contain economic contraction which was led by the pandemic and was expected to affect the informal sector of the economy severely. The economic packages announced by the RBI and the finance ministry helped to mitigate the impact of economic deprivation.
However, the start of the geo-political crisis led to a sharp rise in commodity prices globally. The high crude prices and supply chain disruption led to sharp and sticky inflationary trends. Central banks of major economies increased interest rates to rein in inflation. In India, RBI has raised the policy rate by 190 bps from May 2022 in tranches. This was done to arrest retail inflation, maintain global interest rate parity and ensure currency stability. The hike in the policy rate has resulted in lending interest rates inching up on an average of 140-150 bps.
This increase in the interest rate has not yet significantly impacted the economy as a whole and real estate transactions in particular- both residential and office segments. However, keeping in mind RBI’s inflation forecast of 6.7% till March 2023 which is above the upper target range of 6%, we believe there will be another 40-50 bps increase in the policy rate. This may slow down the momentum that we witnessed during the initial phase of this year. Residential sales are predominantly dependent on home loans and the current mortgage rate has gone up from sub 7% to 8.5% in the last 6 months.
This moving up further to 9-9.5% is likely to impact the sales growth that we have been witnessing for the last 9 months of this year. In the office and other commercial real estate segments, the leasing volume is going back to the pre-pandemic levels, and we believe that this trend will continue till the next 2 quarters albeit with a downside risk of global headwinds. The decision-making is becoming slower in terms of expansion, and we observe cautious optimism among the corporate sector and investors. Despite interest rates moving up, the yield is resilient which can be attributable to the limited supply of Grade A commercial stock in sought-after business districts. Inflation as a leading indicator has been a global concern, but the progress of the domestic economy can be better understood by looking at the Index of Industrial Production, which tracks the volume growth of the manufacturing sector in the economy. IIP covers broad sectors like mining, manufacturing, and electricity and other industry groups like basic, capital, and intermediate goods.
IIP lacks consistent growth trend
Source: Central Statistics Office
IIP tracks the growth of manufacturing activity in different sectors of an economy. The quick estimates of IIP for the month of August 2022 indicate a contraction of (-) 0.8% – an uneven trend in recovery. It is to be noted that though the services sector forms the largest share of GDP (over 50%), the multiple linkages of the manufacturing sector and its impact on job growth assume significance. The long-term trend of IIP growth during and post-pandemic indicates that the recovery cycle has been impacted due to supply chain disruption of inputs as well as rising costs due to geopolitical crises. Various policy initiatives to establish India as a manufacturing hub have been successful in attracting investments. However, such measures will take time to get reflected in growth.
Though the current situation indicates many challenges to economic growth with some global factors beyond prediction and control, the resilience of the domestic economy, relatively better performance of the currency, and proactive policy measures indicate that India’s GDP is expected to post 6.5-7% growth in FY 2022-23 – the highest among the top 5 economies.
The Indian currency has depreciated by around 10% in the last 9 months against the USD. However, it has shown more resilience compared to most of the other currencies in the recent past.
This definitely puts India in a competitive position for global outsourcing business including overall exports and hence the impact in the short term will not be significant. Even though imports may get hit, the gain in exports is likely to outweigh the negative impact. The private final consumption cycle which was extremely subdued has revived recently and is likely to gain pace. The expectation of gradual easing of inflation during the April-June 2023 quarter and possible de-escalation of the geo-political crisis will reduce hurdles to economic growth during the next year. Though the specter of recession seems imminent globally, efforts towards cost optimization, emergence as an alternative manufacturing hub, and strategic alliances would ensure that the Indian economy is expected to fare better than its peers.
(Dr. Samantak Das is the chief economist and head of research and REIS at JLL, India. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)