Silver linings

Updated on: Jul 27, 2022
India is poised to be the fastest growing economy and looks better-placed to weather the headwinds

India is poised to be the fastest growing economy and looks better-placed to weather the headwinds | Photo Credit: Srikrishnan P C 9477@Chennai

IMF’s take on world economy looks like a worst-case outcome. India is better placed than the rest

In its July update on the world economy, the IMF has taken an extraordinarily “gloomy” view. It has revised world growth for CY 2022 down by 0.4 percentage points over its April outlook to 3.2 per cent, with growth in the US and China being revised downwards by 1.4 percentage points (2.3 per cent) and 1.1 percentage points (3.3 per cent), respectively. The triggers at work in the top two economies are a decline in consumer spending and a possible rise in debt default, coinciding with rising inflation and interest rates in the US, and Covid-induced shutdowns in China. According to the IMF, inflation could remain “stubbornly high”, leading to tighter financial conditions and lower growth. It says, “The risk of recession is particularly prominent in 2023, when... household savings accumulated during the pandemic will have declined.” It also cites the 1980s experience to observe, with valid reasons, that “the exact amount of policy tightening required to lower inflation without inducing a recession is difficult to ascertain”. The silver lining here is that India is poised to be the fastest growing economy (IMF pegs growth at 7.4 per cent in 2022 and 6.1 per cent in 2023) and looks better-placed to weather these headwinds, as the Reserve Bank of India’s July Bulletin has observed. Indeed, the RBI is among other forecasters to differ from this grim view, and for some pretty good reasons.

The RBI has pointed to positive global trends such as a decline in commodity and shipping prices since June amidst an uptick in world trade volumes since March. Global PMIs have climbed since March. Domestically, high frequency indicators such as tractor sales have shown an uptick since February 2022, with the RBI being hopeful that rural demand will lift all boats. The revival of the southwest monsoon, along with a moderation of inflation and “an ebullient supply side response” is expected to make India an outlier. Meanwhile, The Economist cites an NBER assessment that says US household debt may not spiral out of control, owing to savings arising out of pandemic handouts. Morgan Stanley makes a distinction between between credit-driven boom-and-bust events such as the Great Financial Crisis, and a liquidity-led one (Covid and after) leading to inflation, and eventually a downturn — pointing out that the second is less worse. At present, US housing and auto industries remain strong, labour market conditions are tight and corporate balance sheets are sound. Indeed, US-China trade deficit so far this year mirrors 2019 levels.

Finally, the outcome could be less grim than a short-term view suggests. The world has been hit by the twin shocks of Covid and the ongoing war; a readjustment of supply and demand in both labour and consumer markets will take time. The disruption of supply chains has meant that pent-up consumer demand could not be met, while the labour market, well placed in the wake of Covid welfare payouts, is bidding up wages. The latter may run out. What is less known is the state of affairs in China. The Ukraine shock has hit Europe in particular through energy supplies, but the rest, including India, may move on. The growing share of emerging markets in global GDP is noteworthy. It is also of great import that just 16 per cent of debt of emerging market economies is in foreign currency. The reality appears to lie between what doomsdayers and optimists have to say.

Published on July 27, 2022
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