Winning Bizness Desk

Two very reputed international organisations have upped their GDP growth forecasts for the country for this fiscal (FY 23). This puts India in the global spotlight—it is the one bright spot in an otherwise gloomy environment that has gripped several developed economies, including the United States and United Kingdom and several other countries in Europe and elsewhere, besides.

The Washington-headquartered World Bank has raised its India GDP growth forecast for FY 23 to 6.9 per cent from its earlier 6.5 per cent. Close on the heels of the World Bank, another global entity—Fitch Ratings—has also raised its growth forecast for the country to seven per cent.

This is a clear indication that many abroad see the Indian economy as possessing a good growth potential going forward. Its strong fundamentals about which a lot has been spoken about in the last two-three years, as well as the resilience exhibited by it, including during the pandemic and present period are the primary reasons for the Indian economy being much better placed than several other countries, including developed ones.

An interesting highlight here is that the two foreign entities have pegged their India GDP growth forecasts higher than that of the Reserve Bank of India (RBI)’s. This is very significant because it clearly reflects a rapidly-increasing foreign optimism about India’s economic prospects going forward.

India’s apex bank has pegged India’s FY 23 growth rate at 6.8 per cent while the World Bank’s figure is 6.9 per cent and that of Fitch’s is seven per cent.

The World Bank‘s upward revision of India’s GDP growth rate to 6.9 per cent from 6.5 per cent is primarily based on the Indian economy’s relative resilience to external headwinds and “a strong out-turn” in the second-quarter of this fiscal (Q2 FY 23).

“India’s economy has been remarkably resilient to the deteriorating external environment and strong macro-economic fundamentals have placed it in good stead compared to other emerging market economies,” Auguste Tano Kouame, the World Bank’s Country Director in India, said in the organisation’s latest India Development Update.

India’s agriculture sector’s outlook has improved following prospects of a good rabi harvest.

A big advantage that India enjoys is its large domestic market and its relatively less exposure to international trade flows. This works in India’s favour—its economy is “relatively insulated from global spill-overs compared to other emerging markets,” the World Bank said.

The World Bank also said that India’s Current Account Deficit (CAD) is “adequately financed by improving FDI inflows and a solid cushion of foreign exchange reserves,” which is very encouraging indeed.

A significant point to be highlighted here is that just about two-months ago in October, the World Bank had drastically reduced India’s FY 23 growth estimate by a full 100 basis points (bps) or one per cent from 7.5 per cent to 6.5 per cent. Now, however, in the brief time period since then, the World Bank has upped its growth forecast number for India.

Fitch Ratings cites the better-than-expected consumption and investment as factors that have the potential to boost India’s forward march this fiscal. In its global economic outlook report, it said “India is shielded to some extent from global economic shocks given the domestically-focussed nature of its economy, with consumption and investment making up the bulk of the country’s GDP.”

The Reserve Bank whose forecast is the lowest amongst the organisations mentioned, has however, pointed to some positives in the economy. It said that the agriculture sector’s outlook has improved following prospects of a good rabi harvest.

Another important positive impacting India’s economy is the USD 100-billion in remittances the Indian diaspora is set to send to the country.

With urban consumption having improved in the last few months on the back of a rebound in contact-intensive sectors, the outlook certainly looks bright in the medium-term. Additionally, the RBI said a robust and broad-based credit growth and the government’s thrust on capital spending and infrastructure should boost investment activity. Consumer confidence is also improving and this is another encouraging factor for the economy.

Another important positive impacting India’s economy is the USD 100-billion in remittances the Indian diaspora is set to send to the country. The World Bank said that this is the first time a single country has reached that landmark figure—a proud record for the country and a significant boost for its economy.

Last year (2021), India received USD 89.4-billion, making it the number one country in terms of remittances received. Significantly, a healthy portion of the USD 100-billion has emanated from developed economies unlike in earlier years when much of the same used to flow-in from a blue-collar work-force abroad.

A few points need to be mentioned here about remittances. The USD 100-billion constitutes about three per cent of India’s GDP but it must be kept in mind that this could just be a one-time phenomenon. Remittances can ebb and flow and a bad economic condition in one country can affect remittances from that country.

With the developed countries presently staring at a difficult period ahead, one must be cautious about remittances remaining as robust as this year’s in the future. Besides, the Indian Rupee has depreciated vis-à-vis the USD and this too could be one reason for a section of the diaspora remitting money to India.

According to the World Bank, this sharp northward movement in remittances has been driven by wage hikes and strong labour markets in the US and other developed countries. In the last few years, many Indians have moved base to the US and other developed economies such as the UK, European countries and Singapore and are presently holding well-paid jobs and hence the high remittances.

However, it remains to be seen how the next two-three years pan out for the developed countries which are presently not very happily positioned economically. A hit to their economies will adversely affect remittances-flow to India and hence it should not be looked upon as a permanent robust source of income.

It must, therefore, be borne in mind that the remittances figure could vary year-to-year and, hence, one has to be cautious and not rely over-much on remittances. However, for the moment, Indians can rejoice as the high remittances positively impact the Indian economy.

Other high-recipient countries of remittances are Mexico, China, Egypt and the Philippines. Two sub-continental countries—India and Nepal—have registered an increase in remittances while other countries in the region have witnessed a fall of more than 10 per cent in the last year, the World Bank report said.

Interestingly, overall remittances to middle-and-low-income nations have expanded by five per cent this year to around USD 626-billion.

India’s growth prospects look encouraging but the government must not get complacent—there are potential roadblocks that could put a spoke in the wheels of India’s economy.

The global economy is in the midst of a slowdown and this will reduce the demand for Indian goods—already in October, merchandise exports declined in excess of 16 per cent in almost two-years. They declined in various segments such as textiles, engineering goods and petroleum products.

Similarly, while the Indian economy is relatively insulated from external developments, it is not totally immune to them. In fact, no country is, in these days of globalisation and inter-dependence of countries on one another.

The Russia-Ukraine war has resulted in higher oil and commodity prices and has very severely affected European countries. With global sea-routes also affected in varying degrees, other countries elsewhere too have been impacted.

India too has been adversely affected by higher commodity prices. However, the India-Russia oil deal has worked in India’s favour—it is the recipient of highly discounted Russian oil which has helped India mitigate the effects of inflation to some extent.

This is highly significant as otherwise India would have been afflicted by runaway inflation; as it is, inflation had moved northward earlier in the year compelling the Reserve Bank to up its repo rate multiple times—the latest being early-this month.

However, while inflationary pressures remain due to geo-political tensions, the good news is that it has been declining in India in the last two-months.

Inflation does not seem likely to pose as big a risk to India as it does to the developed economies and this is good news for the country.

It eased to a 11-month low of 5.88 per cent in November from 6.77 per cent in October. This number is below the RBI’s tolerance level of 6 per cent. According to the National Statistical Office, the Consumer Price Index (CPI)-based inflation has slipped for the second consecutive month. In October it had declined to 6.8 per cent (YoY) from 7.4 per cent in September with favourable base effects coming into play.

The RBI said earlier in the month that inflation trajectory will be considerably influenced by geo-political events. They are imparting uncertainty to food and energy prices outlook. Taking into account these and other factors like imported inflation risks from USD movements and assuming average crude oil prices(Indian basket) of USD 100/barrel, the RBI has projected inflation at 6.7 per cent for FY 23.

However, inflation does not seem likely to pose as big a risk to India as it does to the developed economies and this is good news for the country.

The World Bank enumerated a few challenges before the Indian economy—the first being the monetary policy tightening in advanced economies which has resulted in large portfolio outflows and depreciation of the Indian Rupee. Secondly, India’s Current Account Deficit has also widened, largely on account of the high global commodities prices. The World Bank cautioned that “continued vigilance is required as adverse global developments persist.”

Apart from the Russia-Ukraine war, tensions persist in the Persian Gulf where Iran and the US have for long been engaged in a war of words which suddenly intensified a few weeks ago giving rise to fears about clashes between the two. Any hostility in the Persian Gulf will spook the oil markets pushing up prices sky-high.

Similarly, China continues its sabre-rattling against Taiwan, ratcheting-up tension in south-east Asia. As if these were not enough, North Korea continues with its highly provocative missile tests, raising tension-levels continuously in the Pacific. These external factors, should they get out of control, will severely impact the global economy, including India’s.

Any hostility in the Persian Gulf will spook the oil markets, pushing up oil prices sky-high

Despite these challenges, the Indian economy is on a stronger wicket than most and has the distinction of having fared relatively well even during the most trying times of 2020-22 when the Corona virus pandemic caused havoc.

The economy nursed by the Mr Narendra Modi-led government since 2014 has exhibited strong fundamentals and resilience as is evidenced by the GDP forecasts for this fiscal. In these trying times for the global economy, a GDP growth of close to seven per cent will be very creditable indeed. And India looks set to achieve this.