India’s outlook should be viewed through two lens – medium and short-term. Over the next five years, the authorities are expected to pursue the strategic opportunity presented to the economy to assume a greater role in the world arena.

This is not only a function of the inherent domestic momentum, but also of global forces, marked by volatile geopolitics, supply-chain dislocations, trade skirmishes, climate change, and challenging demographics in a few of the mature economies.

This window can be utilised to revitalise the economy, which is expected to cumulatively provide the ignition to lift the economy towards its goal of $5-trillion nominal GDP.

India will also host the annual G20 Presidency next year, providing a platform to not only host global partners over strategic topics, but also undertake bilateral trade, investment and sustainability discussions.

In the short-term, an interplay of dissipating boost from the reopening dynamic from the pandemic, high cost of financing, base effects, and a tougher global environment are set to moderate the pace of incremental pick-up in growth. Our real GDP estimates stand at 7 per cent for FY23 and 5.8 per cent in FY24.

Views of the RBI monetary policy committee are in the ‘agree to disagree’ camp on the path ahead.

Two members see inflation as well-contained, and anticipate oil prices to be lower than official assumptions.

Others, including Governor Das, point towards sticky core inflation, with a positive view on growth.

Notwithstanding these divergences, it is clear that the rate hike cycle is at its tail end, and we expect a last 25bp hike in February before rates slip into a prolonged pause.

It is also worthwhile to explore macro unknowns as we head into 2023, including a potential policy error by the US Fed, as over-tightening might trigger a deep recession or succumbing to cutting rates too early might send inflation up again.

Second, tighter financing conditions that triggered distress in the broader emerging markets, could hold better due to contained macro stability risks. Developments out of China are a wildcard, and spillover from the great power rivalry from the geopolitical arena in Europe, US, China and parts of Asia, remains a risk.

India’s consumption-driven nature of growth, rising role of non-foreign investors in local equities, and low exposure of local bond markets to offshore interests, will partly shield against difficult market conditions.

Yet, the economy is unlikely to be immune. Adverse terms of trade shock will bode poorly for the current account balance (versus our forecast for -2.5 per cent of GDP) and prop the fiscal subsidy bill, endangering the FY24 deficit (DBS of -5.8-5.9 per cent of GDP target).

A deeper and longer growth slump among the Western economies will not only directly hurt India’s external goods and service sector receipts, but also domestic capex ambitions due to weak demand visibility.

The writer is Executive Director & Senior Economist at DBS Bank, Singapore

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