BY KUMUD DAS
Domestic retail investors rise to the occasion as foreign investors pull out, but challenges remain in the form of inflation and rising oil prices
At the recently concluded spring meetings of the World Bank, the International Monetary Fund (IMF), and G20 finance ministers and Central Bank Governors (FMCBG) in Washington, DC, India’s Finance Minister, Nirmala Sitharaman, made it clear that growth momentum is dampened by prolonged inflation, supply chain disruption, volatility in energy markets and investor uncertainty. The meet assumes significance at a time
when India has been able to tackle crises like Covid-19 very well and thus left a blazing trail for others to follow.
However, things are not going well in the neighbourhood as countries like Sri Lanka, Nepal, Bangladesh, Bhutan and even Pakistan are faced with deep economic crises, whereas India has been able to resume its journey towards becoming a $5 trillion economy in the next few years.
Both Sri Lanka and Nepal are currently faced with a possible forex crisis. Once a ‘basket case’ but now a middle-level economy that has lent money to Sri Lanka recently, Bangladesh, according to an Observer Research Foundation (ORF) study, too has flagged concerns, though not at the same levels as the other two countries. Smaller nations like Bhutan and the Maldives have similar challenges that have yet to reach a crisis stage.
According to noted policy analyst N. Sathiya Murthy, “With national aspirations growing by leaps and bounds thanks to the social media exposure of the urban and rural population alike, Third World South Asian nations have gone on a debt-driven high spending spree, when jobless growth, added to the fundamentals, did not support a repayment scheme.”
Sri Lanka has only itself to blame for the crisis by resorting to heavy borrowing from China for the controversial Hambantota port and Mattala airport projects among a host of other infrastructure projects.
In contrast, India has been doing very well in various sectors. For example, Sitharaman met John Neuffer, president and CEO of the Semiconductor Industry Association, during the event and apprised him of the initiative taken by the country for development of a sustainable semiconductor and display ecosystem with an outlay of $10 billion. Endorsing it, IMF Managing Director Kristalina Georgieva in her meeting with Sitharaman during the event, said, “India’s welltargeted policy mix has helped the Indian economy remain resilient even with limited
fiscal space.” India’s accommodative fiscal stance accompanied by major structural reforms and strong monetary policies have helped in its post-pandemic economic recovery. The IMF MD also appreciated India’s help to its neighbour, Sri Lanka, in tackling its economic crisis.
The biggest-ever ₹21,000 crore Life Insurance Corporation of India (LIC) IPO, which opened on May 4 and closed on May 9, has also given a very clear message to the world that LIC could survive and hit the market without much foreign funds or support. They believed in Indian investors.
Similarly, the Indian stock market has been weathering the heavy sales by the foreign portfolio investors (FPIs) and thus increasing its dependency on domestic institutional investors in the recent past, proof enough of the self-reliance of the country in all economic parameters.
The finance minister was right when she said that G20 is well placed to catalyse international policy coordination to deal with macroeconomic consequences and called for proactive collective efforts towards protecting economies. Apart from conducting a successful vaccination programme to control the spread of Covid-19, India has also been extending Covid relief support to other vulnerable countries.
Challenges to the country’s economic growth exist, such as the current volatile capital market due to heavy selling by foreign institutional investors (FIIs) as they find the US market more lucrative with the Fed bracing to increase its rates. Not to mention that overseas investors have
pulled out over ₹1 lakh crore from the Indian market so far. Still, the good thing is that India continues to remain the highest depository of foreign direct investment (FDI), and Indian retail investors have created the capacity to absorb the shock due to outflow of foreign funds from the country’s stock markets.
The recent off-policy increase in the repo rate by the Reserve Bank of India (RBI) is also a step in the right direction as it will help arrest a second round of inflation in the country and thus support stable economic growth.
Notably, India’s performance in the digital world and the government’s efforts to build the digital infrastructure framework over the past decade have also found widespread appreciation.
In his April 8 statement, RBI Governor Dr Shaktikanta Das referred to the tectonic shifts caused by the conflict in Europe which has created fresh challenges for global growth and the conduct of monetary policy. As the war in Ukraine draws on and sanctions and retaliatory actions intensify, shortages, volatility in commodity and financial markets, supply dislocations and, most alarmingly, persistent and spreading inflationary pressures are becoming more acute with every passing day. Debt distress is rising in the developing world amidst capital outflows and currency depreciations. Recent GDP releases suggest that the global economic recovery is losing pace.
Amidst these challenges, the Indian economy has shown resilience, drawing upon the innate strength of its underlying fundamentals, and supported by a prudent and favourable policy mix. By remaining accommodative, India’s monetary policy continues to foster congenial financial conditions to support growth and mitigate the adverse effects of the geopolitical crisis. As a result, the Indian economy has managed to weather the shock so far.
Reassuringly, India has also been able to preserve macro-financial stability, despite the synchronised shocks of commodity prices, supply disruptions and higher inflation unleashed by the war. Confronted by elevated inflationary pressures that will shift the future trajectory of inflation upwards, it has announced its intention to engage in withdrawal of accommodation to ensure that inflation remains aligned to the target.
As we navigate this difficult period, Das said it is necessary to be sensitive to the new realities and incorporate them into our thinking. In its World Economic Outlook of April, the IMF has noted: “The economic effects of the war are spreading far and wide—like seismic waves that emanate from the epicentre of an earthquake— mainly through commodity markets, trade, and financial linkages.”
It is, however, important to recognise that, despite our strengths and our buffers, India is not an island in this globally connected world. There was a spike in the headline Consumer Price Index (CPI) inflation in March as anticipated in the April policy statement. The inflation for April
edged up to nearly eight percent. There is the collateral risk that if inflation remains elevated at these levels for too long, it can de-anchor inflation expectations which, in turn, can become self-fulfilling and detrimental to growth and financial stability. Hence, the government must
remain in readiness to use all policy levers to preserve macroeconomic and financial stability while enhancing the economy’s resilience.