Number theory | In times of uncertainty, how resilient is India’s economy to global economic turmoil?

Barely a couple of years after the Covid-19 pandemic disrupted the global economy, the world is looking at widespread economic turbulence once again. Inflation rates continue to be much higher than historic levels, not necessarily a result of what economists describe as overheating but due to supply chain disruptions on account of first the pandemic and then the ongoing Russia-Ukraine war. Most experts believe that things could get worse due to gas shortage in winter, especially in Europe. A rise in gas prices will not just put a squeeze on household budgets due to heating costs but also disrupt cost calculations of enterprises due to a sharp increase in energy costs. With central banks across the world raising interest rates to contain inflation – there is still a debate over how effective raising rates is to overcome supply-side inflation – growth rates are expected to suffer yet another blow.

While the Indian economy continues to be a rare bright sport in the world, at least in terms of growth rates, the forthcoming global slowdown and volatility in currency and capital markets has not left it untouched, both on the macroeconomic stability front as well as overall growth. How resilient is the Indian economy to the forthcoming global economic winter? Here are three charts which try to answer this question.

Does India face a balance of payment crisis?

At least two factors have brought this question to the agenda. RBI has used up a significant part of foreign exchange reserves to stabilise the value of the rupee in the past few months and yet the rupee has been losing value against the US dollar. Does this mean that India can face a balance of payment crisis? One of the most commonly used metrics of balance of payment resilience suggests that raising the red flag at this juncture will be premature. India faced its biggest balance of payment crisis in 1991, which in a way, triggered the economic reforms programme. Back then, India’s foreign exchange reserves could have paid for less than month of its import bill. The import cover of foreign exchange reserves has increased consistently since then and it has stayed at comfortable levels since then barring occasional volatility. Centre for Monitoring Indian Economy (CMIE) data shows that India’s foreign exchange reserves would have paid for 8.8 months of imports in the month of August 2022, the latest period for which this data is available. While this looks like a steep fall from the import cover of more than 28.1 months in April 2020, that is more a result of the pandemic completely stopping imports and the fall in import bill because of a sharp fall in crude oil prices. Sure, this multiple has been higher in the past, but it is still not fallen to alarming levels.

Will a global slowdown hurt India’s growth?

It will, via two routes. Exports played an important part in the post-pandemic recovery and with global growth, especially in advanced economies, coming down, India’s export earnings are bound to face headwinds. In fact, this process has already started, as can be seen in the monthly export and import data. “Exports have been a major driver of India’s post-pandemic recovery, but are slowing with weakness in global growth. Mid- and low-tech exports have been slowing since June. High-tech goods export volumes showed their first signs of slowing in August”, a research note dated September 26 by Pranjul Bhandari and Aayushi Chaudhury from HSBC research points out. The other way in which a global recession will adversely affect India’s growth story is a dampening of business confidence due to increased global uncertainty. This does not bode well for the revival of the private cap-ex cycle. Still, the fact that India is not as linked to the global economy, especially manufacturing supply chains, as some other countries (including South East Asian tigers) could prove a redeeming factor.

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Will moderation in global commodity prices, especially oil, help?

It will, When the finance ministry released its Economic Survey before the Budget on January 31, 2022, it envisaged average crude oil prices for the fiscal year 2022-23 at $85 per barrel. This assumption seemed to be very far from reality after Russian invaded Ukraine on February 24. Crude oil prices peaked at more than $120 per barrel in the month of June. Given the fact that India imports more than 80% of its energy requirements, higher crude prices are a triple whammy as they have an adverse impact on inflation, trade balance and the fiscal situation. The only upside which the current recessionary environment has brought for the Indian economy is the moderation in energy prices due to prospects of a fall in demand. In fact, crude prices have actually come below the $85 per barrel mark in the last couple of days. While most experts do not see prices crashing to much lower levels anytime soon, and the rupee’s depreciation has neutralised the fall in energy prices to some extent, policy makers have a much needed cushion in terms of cheaper energy prices as they work to ensure a soft landing for the Indian economy in what is an extremely turbulent global environment.

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