How does one make sense of the current global economic scenario for India? With great difficulty. One is reminded of Mark Twain’s saying, “The art of prophecy is very difficult, especially with respect to the future.” Writing on the global economic scenario today requires humility and courage. But let me be brave and try. If we look first at the three drivers of the global economy — the United States (US), the European Union (EU) and China — they are being driven by different imperatives.
The US has a Gross Domestic Product (GDP) of around $22.5 trillion but an inflation rate of over 8%, levels last seen 40 years ago. The inflation is a result of the massive stimulus injected into the economy, first $3 trillion by Donald Trump in 2020, and then another $1.9 trillion by Joe Biden in 2021. Two straight deficit years of 10% of GDP has spurred demand for goods. Unemployment, which spiked to 15% with Covid-19 in 2020, is down to 3.5% and wages have been rising. Initially, the Federal Reserve (Fed) was unperturbed with the spike in inflation to 6.5% last October. But after the Russian invasion of Ukraine and the inflation rate climbing past 7.5% and then even 9%, it changed its stance and became hyperactive. Rates have gone up from 25 basis points to 3.75% to 4% with expectations of another 100-basis point rise by March next year. The Fed’s actions are aimed at slowing the US economy to bring down inflation expectations. GDP growth expectations are down from 4% to 2.3% and may moderate further to 1% next year. However, the actions also impact the rest of the world.
The EU, with a GDP of around $17.5 trillion, has a different kind of inflation problem. It faces imported inflation due to the massive rise in energy prices and supply chain disruptions, consequent to the Russian invasion of Ukraine. The sharp rises in the Fed rate have led to an outflow of foreign savings and a 14 % depreciation in the Euro. The rate levels in Europe are more modest than the US and are being raised to manage the Euro, rather than reduce demand. But still, on October 27, the rate was raised by 75 basis points, in step with the Fed. The growth forecasts for the EU have also dipped to 1.25% and fears of a recession from the next quarter are ever increasing.
China, with a GDP of around $16.6 trillion and seen as the third pole of the global economy, is experiencing a separate set of challenges. Its Covid-19 policy has caused major economic disruptions. In addition, the actions of Xi Jinping seem focused more on consolidating power than spurring economic growth. Technology players have been stymied and credit curtailed to the real estate sector. Its fallback on infrastructure spending is not getting the same results as before, given its already high-quality infrastructure and directing credit flows to State-owned enterprises, with much lower productivity, is hampering the GDP growth rate. In addition, the one child policy has led to structural labour compression. China is likely to get old before it gets rich. The GDP growth rate is expected to slow down to 2.5% from the target of 5.5%. This, together with Xi Jinping’s muscular foreign policy, has made most nations worry about any supply chain dependence on China. Even Apple is diversifying its production outside of China to India and Vietnam. Some commentators are saying China is unlikely to overtake the US GDP for another 30 years.
With such a sharp contraction in the global economic outlook, one can expect a compression in export demand for India too. However, a global slowdown in economic growth should also soften commodity prices for us. The depreciation in the rupee puts pressure on the current account in spite of a moderation in oil prices, especially as exports are also likely to slow down. Yet, despite the headwinds created by the Ukraine conflict, the overall position for India in the medium term is positive.
Many parameters are strong. The GDP is expected to grow at 7%, bank balance sheets are clean, credit growth has picked up, capacity utilisation has risen to over 70% and its relative overall debt-to-GDP ratio is manageable. One former colleague, who runs the investment management firm, Solidarity, has an interesting analysis to show that the cost of capital — basis inflation or interest rate today — does not need to be significantly repriced, unlike the pressures being faced in the West. If one looks at the Morgan Stanley Capital International index for emerging markets, it shows the change in investor opinion on Indian prospects. If we study the country weights in the index in March 2020 and September 2022, we find that China has gone down from 36% to 29%, while India has gone up from 7.6% to 14.4%. We are now the second highest weight after China. This is a good omen for institutional flows of foreign capital into India.
This does not mean that the current situation is easy to navigate. If interest rates continue to rise in the West with the consequential pressure on the rupee, if oil stays above $100 a barrel because of the continuing war and a cut in supply by the Organization of Petroleum Exporting Countries, and if IT services exports take a hit, the current account will be stressed. No doubt, the economy will require deft handling. But all things considered, the question to ask is where would you rather be in the world today? My simple answer is India. Time to make it happen.
Janmejaya Sinha is chairman, BCG IndiaThe views expressed are personal
