As Global Gloom Sets In, Will India Manage To Shield Its Growth Rate?

While presenting the Union Budget earlier this year, Finance Minister Nirmala Sitharaman pegged the country's economy to grow at 9.2 per cent. Just a few weeks later, Russia invaded Ukraine, leading to a series of changes in the global economy which have had far-reaching impacts. Since then, India's growth projections have been slashed several times by various agencies, the latest of which was done by the International Monetary Fund (IMF).  

In its latest World Economic Outlook report, the IMF projects a growth of 6.8 per cent for India in 2023, a further 0.6 percentage point downgrade since its July forecast. Many other agencies, including Citigroup, Asian Development Bank and Fitch Ratings, also estimate India's growth rate at 7 per cent or lower. The forecast by S&P Global Ratings paints a relatively optimistic picture for India and suggests a growth rate of 7.3 per cent.

In the previous financial year, India's GDP had grown 20.1 per cent year on year after contracting 24.4 per cent in FY21 due to nationwide and localised lockdowns. Yet, in the first quarter of FY23, the GDP contracted 9.6 per cent as against the March quarter of FY22 which triggered the subsequent downgrading. 

Even the Reserve Bank of India, in its September Monetary Policy Committee meeting, decided to cut its GDP growth forecast for 2022-23 to 7 per cent from the previous 7.2 per cent. It said that the revision was due to the impact of geopolitical tensions, tightening global financial conditions and slowing external demand. The global growth projections have only added more uncertainty to the prevailing situation. 

Global Gloom  

According to the IMF report, one-third of the global economy is expected to see a contraction this year or next. “Global growth is forecast to slow from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic,” the report says. 

The three largest economies—the European Union, China, and the United States—will continue to stall and increasing price pressures are expected to threaten future prosperity by adversely impacting real incomes and undermining macroeconomic stability, says the report. The Russian invasion of Ukraine and the lingering effects of Covid-19 are cited as causes for the global slowdown.  

“This year’s shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession,” said Pierre-Olivier Gourinchas, Economic Counsellor at IMF, in his official blog.  

The report goes on to estimate Asia's growth at 4.9 per cent for 2023 while China, coming out of one of its lowest growth profiles in almost four decades, is expected to grow at 4.4 per cent.  

China's declining growth rate can be attributed to the multiple Covid-19 breakouts and the worsening property market crisis in the country, said the report. 

In comparison to its Asian neighbour, India's projected growth is seemingly better. However, India has several domestic and global hurdles in the way of achieving its estimated growth rate. 

India's Challenges 

If adverse global economic conditions cause a consumption slowdown in developed economies, it will have a negative impact on India's exports.

In August, India's exports fell by 1.15 per cent year on year while imports rose by 36.8 per cent. At the end of the first five months of this fiscal year (April-August), India was left with a record trade deficit of $125.2 billion which is nearly two-and-a-half times the level in the same period a year ago.  

The rupee has already depreciated 7 per cent against the US dollar through this calendar year and it is likely to remain under pressure, adding to inflation and macroeconomic vulnerabilities. If the rupee continues to fall, it would bring down India's forex reserves and harm the country's ability to import.

High inflation will force RBI to keep increasing interest rates, squeezing cash out of the economy, which will further impact the government and industry’s ability to borrow and spend in capacity creation. Also, India is yet to fully recover from the Covid-induced rise in poverty and the high levels of unemployment in the country.

On the face of it, it looks like India is in a better position to weather the impending global slowdown. India’s inflation, when compared to other countries, is less and the projected GDP growth rate is better. However, keeping the internal economic challenges in mind, it remains to be seen whether the Indian economy can grow at the presently projected rate. If not, the 9.2 per cent growth forecasted during the Union Budget would seem like a far-fetched dream in hindsight.