India's finance ministry and RBI don't expect any slowdown in the growth momentum as some developed economies slip into recession
The slowdown in the global economy is back in the spotlight as two major economies slipped into recession in the last one week. Japan’s gross domestic product (GDP) shrank unexpectedly for two consecutive quarters in the second half of 2023 while United Kingdom also reported a similar decline in the final two quarters of the last year.
International Monetary Fund (IMF) projections suggest that the global economy slowed down to 3 per cent in 2023 from 3.5 per cent in 2022. The sluggishness in the growth of major economies has been a dampener for developing economies like India as exports and foreign investments have lost momentum.
India’s overall exports, which include both merchandise and services, declined year on year by 0.19 per cent between April 2023 and January 2024 as compared to the year ago period. Imports have fallen by 5.69 per cent year on year during the above-mentioned time frame.
With major economies like Japan and UK starting the year on the back of a tepid note, observers tracking the development say that the pressure for India is expected to continue in merchandise exports as global economy is still exhibiting signs of weakness. But the projections of the government and analysts suggest that the resilience seen in growth numbers is not expected to go anytime soon.
Effect Of A Slowdown
India has seen a slowdown in its total foreign direct investment (FDI) inflow in the last couple of years. After growing by 20 per cent in the financial year 2019-20, the total FDI inflow recorded 10 per cent and 3 per cent growth in FY21 and 22. In the last financial year, it fell hard by 16 per cent.
In the current financial year, government data showed that the country attracted $33,125 million till September 2023. Importantly, the current fiscal is seeing record inflows from foreign institutional investors (FIIs) who have pumped in $20,873 million. In the last two financial years, these investors had taken out close to $19,000 million.
Focusing on UK and Japan, India has close trade relations with both the countries. Till December 2023, total imports from the UK stood at $6,104 million, constituting 1.2 per cent share of the country’s total imports. Exports to UK was recorded at $9,456 million in the same period, a share of 2.9 per cent in India’s total exports.
Similarly, India’s overall exports to Japan in the current financial year till December stood at $3805 million, making up for 1.2 per cent share of total exports. Imports from the country at $13,198 million in the same period constituted 2.6 per cent of total imports.
Notably, India is in advanced talks with UK for a free trade agreement which was originally slated to be completed by Diwali 2022. However, due to concerns over a few provisions, the two sides have been engaged in intense discussions to conclude the talks soon.
Both Japan and United Kingdom are also big sources of FDI flowing into the country, ranking fifth and sixth respectively. Between April 2000 and September 2023, FDI originating from Japan and United Kingdom stood at $40,838 million and $34,514 million.
Hit to the business and consumer sentiments in the country can dampen the rate of growth in investments and growth with UK and Japan. Slowdown in exports and investment inflows show that India is not only facing the brunt of a slowdown in these two countries but also in other developed nations as well. If the projections of Germany’s central bank are to be believed, then the European powerhouse is also expected to slip into recession soon as its GDP is projected to shrink by 0.4 per cent in the final quarter, a second consecutive decline after the economy shrunk by 0.1 per cent in the third quarter.
Both CPB trade monitor and Baltic Exchange Dry Index, known as important indicators of global economic activity, are recording weakness. The latest CPB reading for November 2023 showed that world merchandise trade declined by 1.4 per cent. The Baltic Dry Index, which tracks movement of raw materials by sea, has declined by 50 per cent in the last two months.
Resilience Amidst Sluggish Growth
While the global economy has slowed down, India’s domestic investment momentum has been resilient enough to hold the ground for now in terms of growth. Government’s capital expenditure hikes in the last four years, from Rs 3 lakh crore for FY20 to Rs 11 lakh crore for FY25, has helped the rate of public investment to shield the economy from external headwinds.
The advanced estimates of the government suggest that the economy will grow by 7.3 per cent in FY24, up from 7.2 per cent recorded in FY23. While domestic strength in industrial activity and services sector has helped, resilience in the United States economy has also allowed the global economic environment to still remain buoyant.
Despite significant shocks in the form of the slowing global economy and the Red Sea crisis, merchandise exports managed to post 3.1 per cent growth in January. Market intelligence firm Crisil said in a note, “Exports are displaying resilience in the face of unfavourable conditions. To be sure, they are getting support from a depreciating rupee and stronger-than-expected growth in the US, a key trading partner.”
But there are signs that the dark clouds over global economic growth are still hurting India’s growth. Core exports such as electronic goods (9.3 per cent vs 14.4 per cent), engineering goods (4.2 per cent vs 10.2 per cent) and drugs and pharmaceuticals (6.8 per cent vs 9.8 per cent) witnessed sequential moderation in growth in January as compared to December.
But India’s finance ministry doesn’t expect any significant impact of global headwinds on Indian economy. In its latest economic review note, the ministry said that softening inflation, good rabi harvesting season and sustained manufacturing profitability are all set to help in growth during FY25. The note said, “Prospects of healthy rabi (winter crop) harvesting, sustained manufacturing profitability and underlying service resilience are expected to support economic activity in FY25.”
The ministry added that India must work on the competitiveness of its exports. “Lower input prices and overall inflation can influence output growth positively, which in turn can further improve the prospects for exports,” it said.
Despite the sluggish global growth environment, Reserve Bank of India (RBI) had increased the projections for GDP growth in FY25 to 7 per cent from its earlier 6.6 per cent. While more developed economies slip into recession, the policymakers for now don’t expect any significant brake to India’s growth story.