Given how the spillover effects from the global slowdown and monetary tightening could offset much of the resurgence in local consumption demand, the World Bank’s gross domestic product growth forecast of 6.5% for India in FY23 appear far more realistic than the Reserve Bank of India’s marginally-lowered 7%. There is no doubt that we are in a difficult world, and expectations of growth have to be tempered. The pain could worsen in FY24 with the economy expected to grow at an even slower 5.8-6% as local factors—high inflation, rising interest rates, limited investment and job creation—affect the post-pandemic recovery. However, the priority in this challenging environment for the government and Reserve Bank of India (RBI) would be to preserve macro-stability rather than push for growth.
As Chief Economic Advisor Anantha Nageshwaran has pointed out, India needs to be particularly watchful about the external sector at a time when crude oil prices have rebounded sharply, the dollar continues to strengthen and the rupee has already fallen through 82 levels. The fact is a weaker rupee makes imports costlier and stokes inflation. A widening current account deficit (CAD) amidst a tighter global financial environment, in which capital inflows—portfolio and FDI— slow down, might at some stage, call for import curbs. By some estimates, the CAD could hit 3.8-3.9% of GDP. Again, while the forex reserves, at $533 billion, do take care of about nine months of imports, it might not hurt to start pulling in non-resident Indian deposits via special schemes. To be sure, the weaker rupee does make exports competitive given that peer currencies are also losing value against the dollar. However, its beneficial impact is debatable at a time when world trade is fast decelerating—the World Trade Organization has forecast a growth of just 1% in 2023. In the first half of FY23, non-oil exports increased by just 5.6% y-o-y.
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Also, while the post-pandemic recovery is no doubt gathering momentum, with a clear pick-up in the services contact-intensive spaces, its durability is uncertain. The recovery has been helped by government capex spends. If the buoyancy in tax collections and other revenues doesn’t sustain, the government would be compelled to cut back on spends to rein in the fiscal deficit. In that context, it is crucial that the government sticks to its 6.4% target as it would help to keep some of the ammunition dry. Also, financing deficits through the bond markets will become increasingly difficult and will drive up interest rates further; already the benchmark yield is touching 7.5%. It will become extremely hard for the RBI to ensure the government borrowing programme goes through at affordable rates. Higher borrowings will crowd out private investments.
With inflation expected to remain elevated—crude oil prices are back at over $95/barrel post OPEC’s production cut announcement—the central bank would, in any case, need to hike rates by another 50-60 basis points having raised the policy rate by 190 bps since May. Given the swift transmission of higher lending rates, private sector investments as well as retail credit may take a knock. The fact is medium and small enterprises, self-employed and weaker sections are still struggling in the aftermath of the pandemic and will need support. Apart from planning for bigger food and fertiliser subsidies, the government must spare a thought for them too.