Amid global economic turmoil, India remains resilient with positive indicators for growth and consumption
BY KUMUD DAS
At a time when the global economy is faced with a host of ongoing challenges, India is steadily emerging as one of the fastest growing economies in the world. According to Reserve Bank of India (RBI) Governor Shaktikanta Das, “Amid the global economic crisis and despite the unsettling global environment, the Indian economy continues to be resilient.” Significantly, India has already secured its position in the top five global economies of the world in terms of size of GDP, by surpassing the UK.
The world has witnessed two major shocks—the Covid-19 pandemic and the Ukraine-Russia conflict—which have had a profound impact on the global economy. All segments of the financial market, including equity bonds, and the currency market are in turmoil across the world. In fact, the just concluded Samvat 2078 will go down in history as one of the most volatile years when exuberance around tech stocks and the IPO boom was followed by the Russia-Ukraine war, multi-decade high global inflation and the fastest interest rate hikes in recent times.
Amid this hazy global scenario, India is today looking like a pearl in the ocean with benefits from food security, domestic demand-driven economy, the Productionlinked Incentive (PLI) scheme across the manufacturing and defence production sectors, a strong banking system with decade-low non-performing assets (NPAs), strong infra capex and rising investments in unicorns.
Even as high inflation has impacted demand in lower and lower middle income sections, festive demand is buoyant with the waning Covid impact, good monsoons, pick-up in infra and real estate development, and strong hiring demand across sectors. Although an uncertain global environment and expected slowdown in the US and Europe remain a concern, a report by Prabhudas Lilladher believes India will successfully navigate this period and emerge stronger. In fact, analysts continue to prefer companies with presence in emerging segments, strong balance sheets and business moats.
The New York Times was right when it wrote in September, “As global economic growth slows sharply, with many major economies gripped with worries of recession, there has been a conspicuous exception: India.”
This is not all. Have a look at the narratives used by other global stakeholders. Deutsche Bank chief executive Christian Sewing called India the “shining star” of the global economy at the moment. Citigroup chief Jane Fraser back in July called this a “pretty unique point in time for India”. International Monetary Fund Managing Director Kristalina Georgieva also reportedly called India a “bright spot” in the global economy.
Gopal Krishna Agarwal, national spokesperson of the ruling Bharatiya Janata Party, says, “We are hopeful that the RBI’s target of 6 percent inflation will be met. Globally, there is a recession. Commodity prices are softening, crude oil prices are coming down too.” Inflation is at 7 percent at present. The RBI is looking to bring it down to 6 percent which is much lower than in even developed countries like the US and European nations, he said.
The pandemic and the war in Europe have pushed the economic issue to the centrestage globally. Many countries are facing economic challenges—some are on the verge of sovereign default and some have already defaulted. On the other hand, India, with its current GDP at USD 3.15 trillion, is the fastest growing economy in the world. India is now the fifth largest economy in terms of GDP and is poised to be the third largest economy in the near future.
There are several positive indicators. Purchase Manager Index (PMI) —services and manufacturing—is in expansion mode. In September, service sector PMI stood at 54.3 and that of the manufacturing sector at 55.1. Bank credit is steadily growing. In August, the year on year growth figure was 15.5 percent, which is the highest in nine years.
The Central government expenditure in infrastructure as well as capex by public sector units (PSUs) is on the rise. Corporate sector earnings are also growing. Direct tax collection for the year has increased by 24 percent and GST collection for September has crossed ₹1.47 lakh crore.
There is upward momentum in air traffic, coupled with increase in travel, tourism, retail and recreational visits. India’s exports have hit a record high and are increasing further. There is significant increase in defence exports with the sale of the indigenously developed and manufactured Tejas aircraft and other arms and equipment to other countries.
The country is blessed with strong and well-capitalised PSU banks with NPA recovery happening through the Insolvency and Bankruptcy Code (IBC) mechanism. A corruption free delivery ecosystem through technology integration like Direct Benefit Transfer (DBT) and Jan Aadhaar Money (JAM), and leakage-proof collection of direct and indirect taxes was already in place. Policy reforms like the new logistics policy, strong connectivity in terms of rail, road, waterways and airways, digitisation initiatives like those relating to land records, data transparency have helped greatly. India has witnessed the highest number of real-time digital transactions in the world. Around 678 crore transactions occurred in September with a gross value of approximately ₹11.84 lakh crore. Internet penetration to nearly 6,25,000 villages at panchayat level, along with 5G services are heartening signs. As of now, 100 unicorns with a robust start-up ecosystem are flourishing.
Coming to gold, prices underwent significant volatility with a peak to trough ratio of about 1:2. In March, prices took off to near record highs on the back of geopolitical tensions between Russia and Ukraine. However, they swiftly cooled off as the geopolitical pressure waned. In addition to this, the tightening cycle and withdrawal of liquidity by global central banks added further downward pressure on the prices. Despite this, gold has given returns of around 7 percent since the start of Samvat 2078. Now the question on investors’ minds is, will gold shine? Well, the answer to this is extremely uncertain and unpredictable given the rapidly changing economic environment and the push and pull of various macroeconomic and geopolitical factors.
The quantitative tightening cycle by the majority of the central banks to combat rising inflation has been a clear headwind for asset classes such as equities, bonds, and gold. When the interest rates are hiked, it increases the yield on government bonds which in turn increases the real yields. For instance, the US 10Y TIPS yield is now at 1.5 percent compared to –1 percent in January. This incentivises investors to move the money into a positive yielding asset as gold is a non-yielding asset class.
The flight of money into bonds has strengthened the US dollar with the DXY (US Dollar Index) trading at a 20-year high near 114. Therefore, the combination of a strong dollar along with the rising yields had a bearing on the gold prices. If the US Fed achieves a soft landing in an ideal but unlikely scenario where inflation is brought under control and the economy remains robust, gold prices will continue to remain on a downtrend.
However, there are a host of other factors that have given a floor to gold prices. One is the ongoing uncertainty surrounding the Russia-Ukraine war where Russia has threatened to use nuclear weapons to annex parts of Ukraine. Any such geopolitical flare-up would result in risk aversion and divert flows to relatively lower risk assets like gold. Additionally, rising inflationary pressures due to the disruptions caused by the war may result in a further uptick in inflation. Given the fact that the economy has already started slowing down, a further rise in inflation could cause stagflationary pressures. Historically, a stagflation-like scenario has been good for gold prices.
Recent incidents such as what happened with the UK pension funds, where higher interest rates led to falling bond prices which in turn triggered margin calls from banks because of the complex leveraged products, may cause systemic risks to the economy. The era of free money during the pandemic may have resulted in malinvestments and there is a possibility of excessive defaults and losses due to the withdrawal of liquidity that may eventually lead to disruptions in the financial markets.
However, prospects of economic growth cannot be analysed through challenges alone but depend on the strength of the institutions to manage them as well. India has challenges but its strength is based on a decisive government with strong leadership, prioritising national interest in matters like crude oil purchase policy despite global pressure, and bilateral trade in rupee terms with more and more countries.
(The writer is a Mumbai-based senior business journalist.)