Ours is the fastest growing major economy: How come?

We have to interpret this honor with caution, because there is still a lot we need to fix

India is the fastest growing major economy today at 7% and while the world sleeps from recession, we are awake and have many opportunities to take advantage of it, said a statement at various conferences and investor calls. The implied tone is one of pride as well as schadenfreude. Are we really in this sweet spot? Are we really disconnected from the world?

From a numerical point of view, there is no disputing the number as our economy achieved high growth in 2017-18 despite demonetisation. Also, most forecasts, including those of the International Monetary Fund, see growth slowing in 2023-24, but in the 6-6.5% range, higher than in all other major economies. Thus, the Indian growth story is a winner in every way. The interesting thing about the expected 7 percent growth in 2022-23 is that our economy will slow down in the second half of the year. According to Reserve Bank of India (RBI) forecasts, we will see a slowdown from 13.5% in the first quarter to 6.3% in the second quarter and then to 4.6% each in the third and fourth quarters. The last two quarters will be worrying as growth was 5.4% and 4.6% in 2021-22, which should have provided a statistically low base for higher growth this year. But that doesn’t happen, so we need to assess what’s wrong with our economy.

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The first question concerns corporate profitability, which shows how inflation has affected the balance sheet. The results of the second quarter show that the sales volume of non-financial companies increased by 25-30%, which is due to lower demand. However, profits have almost universally declined and this is because companies have witnessed a high increase in initial costs that cannot be fully passed on. It also means misery will continue for the rest of the year as inflation will remain high for the next 3-4 months. The solution is to continue working to reduce inflation.

Second, the data again suggest that higher inflation (and its higher consumption spending) has had a negative impact on savings, which have come under pressure this year. In 2021-22, financial savings have declined, according to RBI data. Steady consumption, bringing in good GST collections and improving the company’s bottom lines led to cost savings. This is again the effect of inflation. This is not good news as banks face the problem of slow growth in deposits relative to loans. We need to stimulate savings through appropriate tax incentives. A decrease in savings means that we will have a large current account deficit (CAD), defined as the difference between savings and investment. This deficit may be 3-3.5% of GDP in 2022-23.

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Third, exports were affected by recessionary conditions in the West. Textile industry, mechanical engineering, jewelry, chemistry, etc. Some sectors have been hit hard by the slowdown, as demand has come under pressure from a combination of low Western growth and high inflation, hurting our exports. In the West, recession-like conditions will remain, although inflation will decrease next year. Therefore, exporters should be prepared for prolonged stagnation. We need to think differently and look carefully at the composition and direction of our exports.

Fourth, slowness is a red flag for the Western software industry. We are already seeing layoffs at Big Tech companies that are being outsourced. This is important because both software flow and remittances support our current account. Our trade deficit is bound to widen as import demand remains stable at 7% growth. Exports will remain low until the global economy recovers. Annual software revenues of more than $120 billion have supported our current account in the past, but it will be difficult to prevent a slippage here.

Fifth, as India’s finance minister pointed out, the cycle of private investment should pick up. So far, it appears to be concentrated in a few sectors, such as steel and telecom, and not broad-based. A more extensive recovery may take time.

Sixth, consumption growth may be an inflation-driven mirage as several consumer goods marketers have flagged low rural demand as a concern. This season, the yield of rice and pulses will be low, which will affect the income of farmers. Therefore, one should be careful in interpreting the signals here.

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Seventh, the issue of employment is still pending. Whether it will rise or not is debatable. The bad news is that several new-age firms, especially startups, are going through layoffs. Post-Covid, many companies have adopted technology for day-to-day processes. Now that yields are under pressure, jobs are at risk even on the domestic front. We need more openings in the qualified market space instead of downstream delivery jobs to keep consumption going.

Although we have ambitious goals to connect to global supply chains, our relative isolation has helped us this time as our economy remains the world’s fastest-growing major economy. This epithet does not hold when India’s growth is linked to the prosperity of other countries. Currently, only the foreign portfolio and direct investments are vulnerable to external factors, and exports are an addition to growth.

In conclusion, we should interpret the title “best emerging economy” with caution. Much remains to be done by the government and the RBI in providing the right policy environment. But the steering wheel will be in the hands of private investment.
Source: Livemint


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