Food self-sufficiency, a sizable foreign exchange war chest, and a sizable software export industry helped to mitigate the shortages of hard currencies and commodities, but there are still gaps that need to be filled.
an employee at a spice and legume kiosk in a New Delhi market. According to Bloomberg Economics’ research, India’s GDP growth dropped from 6.3% in the previous quarter to 4.6% year over year in 4Q22.
India has spent the previous two years combating the twin hurdles presented by more costly raw resources and a stronger currency, like many developing nations that depend on the rest of the globe for commodities and money.
Trouble used to come one at a time, never in pairs. From 2002 to 2008, when the price of food, gasoline, and fertiliser soared, US cash was cheap and plentiful. From 2011 and 2020, when the value of the dollar rose, everyday goods were less expensive. They tended to shift in the other direction, offsetting the overall detrimental effect on output and pricing. But, stagflation risks increased in emerging economies that import commodities when the two rose in tandem in 2021 and 2022, according to new analysis from the Bank for International Settlements.
Fortunately for India, a portion of this two-year span fell after COVID-19’s reopening. Food production self-sufficiency, a sizable foreign exchange reserve, and a sizable software export sector all contributed to mitigate the hard currency and commodities shortages that, to varying degrees, hindered the region’s border markets, Sri Lanka, Pakistan, and Bangladesh.
Urban professional class pent-up demand supported development until GDP growth slowed to 4.4 percent in the December quarter and private consumption rose just 2.1 percent from a year earlier, down from 8.8 percent in the prior three months. It is concerning that spending has fallen down so quickly during important Hindu holidays. The prognosis for domestic demand has deteriorated due to investments slowing down after seeing robust growth earlier in this fiscal year.
Even at home, money is limited. The Reserve Bank of India has drained surplus money from the epidemic era and hiked its benchmark interest rate in an effort to control persistent core inflation. Next month, it could have to provide an additional 25 basis points of growth, taking the
At home, money is also a concern. The Central Bank of India has drained the surplus money left over from the epidemic era and hiked its benchmark interest rate in an effort to control persistent core inflation. The terminal rate might rise by another 25 basis points the following month, to 6.75 percent, far higher than when the RBI started its campaign in May.
The world economy isn’t anticipated to be much of a help. Almost everyone has tight financial circumstances, and demand is weak. The Russian campaign in Ukraine shows no signs of abating. Even China, which has long been isolated, has set a moderate yearly growth objective of approximately 5%, but one benefit of this might be that commodities prices won’t spike once again. While certain European countries, including Germany and Italy, are predicted to enter a recession, the Federal Reserve has not yet declared success in the fight against inflation.
Other developing market tremors are also having an impact, and a very disruptive currency restriction in Nigeria is probably leading to production reductions at the Indian facilities of Bajaj Auto Ltd. In January, the motorbike manufacturer’s export volume fell to a 30-month low. The fifth-largest economy in the world, according to Nomura Holdings Inc., is expected to grow its GDP by only 5.3 percent in the fiscal year that begins on April 1. This is much less than the central bank’s predicted 6.4 percent growth. “Overall, India’s economic drivers are steadily fizzling,” its economists Sonal Varma and Aurodeep Nandi said.
At home, money is also a concern. The Reserve Bank of India has drained the surplus money left over from the epidemic era and upped its benchmark interest rate by 250 basis points in an effort to control persistent core inflation. The terminal rate might rise by another 25 basis points to 6.75 percent by the end of the month, which is far more than what was anticipated when the RBI started its campaign in May.
The cost of borrowing has increased to the point that higher mortgage payments may have an impact on household finances. The monetary policy committee of the RBI has at least one outside member who is uneasy: According to Jayanth Rama Varma, a finance professor at the Indian Institute of Management in Ahmedabad, economic development looks to be “extremely unstable”.
To keep this shaky economy from collapsing, Prime Minister Narendra Modi’s administration would have to rely on government expenditure. Yet, there are resource limitations. One reason is that slower GDP growth will also result in decreased tax receipts. With reduced subsidies for food and fertiliser, New Delhi hopes to save money. Yet, climate change adds another layer of complexity, as heat waves threaten what is predicted to be a record-breaking wheat crop. Companies that produce consumer staples are staking their future on rising rural demand and farm earnings. Farmers won’t be very amenable to increased market pricing for fertilisers if that doesn’t happen.
It won’t fly to push for higher budget deficits when markets anticipate fiscal contraction. Furthermore, expecting New Delhi to increase resources through increased privatisation in an election year is unrealistic. The government’s business policies are now being scrutinised more closely as a result of the $130 billion stock market crisis involving infrastructure mogul Gautam Adani, even though the businessman insists he received no improper benefits from his close connection to Modi. Also, it has left a significant buyer of state assets in the dark.
There are few visible signs of the $24 billion in five-year government incentives making progress in either creating factory jobs or reviving the declining importance of manufacturing in the economy, even though Apple Inc.’s vendors are making or considering investments in India, primarily to reduce the risk of being sucked into the spiral of deteriorating US-China relations. The workforce participation rate for boys aged 20 to 24 in Uttar Pradesh, a state in northern India with a population that rivals Brazil, decreased from almost 66 percent before COVID-19 to just over 34 percent in the fourth quarter of 2022. According to Mahesh Vyas of the research tank CMIE, only 3.4 percent of young women participated in the workforce.
Opposition parties are rolling back two decades of reforms and creating a vulnerability to India’s shaky economic underpinnings by requiring public employees to participate in an outdated defined-benefit pension scheme in states where they are in power. This increases the insecurity of the least fortunate. The co-movement of commodity prices and the dollar over the past two years has increased the dangers of stagflation, although India may not have been as negatively affected as its smaller neighbours. Yet, they haven’t exactly spared the 1.4 billion population. It could be time to develop a solid strategy to undo the harm now that reopening is in the past.
