In the last few weeks, the Indian economy has delivered quite a few signs signalling that in a gloomy inflation-scares-ridden global macro-environment, it could perhaps occupy the vaunted position of an outlier.
The gross domestic product (GDP) figures which were released today were estimated to rise by a robust 15.4%, as per a Bloomberg survey of economists.
None less than the IMF has predicted that the economy of the sub-continent will continue chugging at a fast clip of 7.4% for FY23, while China’s economy, according to the international financial institution, will only log a measly growth of 3.3% for FY23.
Analysts at Morgan Stanley earlier this month dished out a shining report card for the domestic economy stating that it will likely clock in at an average GDP growth rate of 7% in this fiscal and will go on to contribute a sizeable 22% and 28% to the global and Asian economies.
There are other propitious signs on the horizon as well. CPI inflation eased down to 6.71% in July which, even if uncomfortably higher than the RBI’s inflation upper tolerance band of 6%, is still welcome given that it has eased considerably from a savings-erosive 7.79% in April this year. It also helps that the crude oil price, which ratcheted in the aftermath of the Russia-Ukraine conflict to as high as $135/bbl, is now trending at $ 97/bbl, thanks to a progressively dampening demand scenario in China as well as the USA.
However, all these positive developments have a foundation as strong as a house of cards and are likely to come undone sooner rather than later in the face of inclement global macroeconomic conditions.
US Federal Reserve Chair Jerome Powell has already hinted that there is quite a lot of pain in the offing. In fact, it won’t be wrong to say that serving pain – quite deliberately and intentionally – is the macroeconomic strategy that Powell has opted for as a means of tamping down on inflation.
There is no easy way through the spectre of an inflationary spell, and Powell knows this well.
“Without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them,” said Powell, displaying surface-deep sympathy before pointing out that, “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance.”
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation,” he said.
Whichever way one looks at it, the most acute spell of inflationary pain will be borne by those at the bottom of the pyramid, and the contagion, in all likelihood, will take the Indian poor in its fold.
Prioritising inflation over growth
Kotak Institutional Equities Research expects the RBI to stick to its rate hike trajectory till inflation succumbs to a tolerable level. In a research note, it cautioned that it does “not like the combination of expensive market valuations and uncertain outlook on energy prices even though the Indian economy and Indian market earnings both appear to be on solid footing.”
The report goes on to state that likely higher global crude oil prices in the winter in the northern hemisphere may result in higher domestic fuel prices (contrasted with the fact that India has kept its retail automobile fuel prices at well-below market-parity levels) and inflation both.
“The threat of higher energy prices may also constrain the RBI’s monetary action; it is unlikely to change tack unless it has firm evidence of inflation falling to and staying comfortably within its target band,” the research note read.
On top of global worries are other concerns on the domestic front.
The month of June remained marked by excessive rainfall – the South Peninsula and Central India received rainfall that was 60% and 43% above the long-period average – which will most likely hurt cumulative yields. ICRA states that excess monsoon rains dampened electricity generation, coal output, rail freight and diesel consumption in the month of June, leading to a dent in the economic activity for that month.
Distressingly, the ICRA Business Activity Monitor dipped by 2.6% MoM in July, 2022, led by 11 of the 14 non-financial indicators such as vehicle registrations, fuel consumption and non-oil exports. However, there is a measure of relief to be drawn from the fact that the index surpassed its pre-COVID July, 2019 levels by a healthy 12.5% in July, 2022, driven by steel consumption, GST e-way bills, exports, electricity generation and coal output.
For now, news on the economic front for India remains a mixed bag. Given the worsening global conditions, it may not stay so for long.