*Economy in a bind: The tag of world’s fastest-growing economy is just a small consolation | The Financial Express

lipped from: https://www.financialexpress.com/opinion/economy-in-a-bind-the-tag-of-worlds-fastest-growing-economy-is-just-a-small-consolation/2498320/

Two years of Covid have sapped the economy and, as RBI noted recently, economic activity is recovering but is barely above its pre-pandemic level.

That, to some extent, explains the IMF’s very modest growth estimate for India of 6.9% for FY24.That, to some extent, explains the IMF’s very modest growth estimate for India of 6.9% for FY24.

A downgrade in the International Monetary Fund’s (IMF’s) growth forecast for India to 8.2% for the current fiscal was always on the cards post the outbreak of the Russia-Ukraine conflict and the surge in crude oil prices to levels way past $100 per barrel. Indeed, the impact of the war is expected to be so severe that global growth will decelerate sharply to just 3.6% in 2022 from current estimates of a robust 6.1% in 2021. Moreover, the effects will be long-lasting because over the medium term, beyond 2023, global growth is projected at 3.3%. Worryingly, from India’s point of view, the increase in world trade volumes is expected to slip to just 5% in 2022 and further to 4.4% in 2023. That, to some extent, explains the IMF’s very modest growth estimate for India of 6.9% for FY24.

Two years of Covid have sapped the economy and, as RBI noted recently, economic activity is recovering but is barely above its pre-pandemic level. The high inflation, the fallout of the rise in prices of key commodities, could jeopardise the nascent recovery. The high inflation could squeeze real disposable incomes, making lower-income households particularly vulnerable as expenditure on food and electricity is typically inelastic. Even if nominal incomes rise, demand could be reined in as companies move to pass on the additional costs to consumers. If consumption slows, it would further delay the pick-up in private sector investments. Capacity utilisation moved up to 72.4% in Q3FY22 from 68.3% in the previous quarter, but this could reverse if firms believe demand will stay stagnant for a prolonged period. In fact, it is possible companies would even scale back production from current levels if they believe it is not profitable enough because high raw material and interests are hurting. A cutback in production by companies would be deleterious for the economy at a time when unemployment remains high and very few sectors are creating jobs. To be sure, the renewed demand for services will cushion the blow, but here too, rising costs, especially of transport, could rein in spends.

Exports had started contributing meaningfully to India’s output, but slowing global growth—especially in Europe and China—could queer the pitch. Already, recent trends indicating a deceleration in volume growth, even before the Russia-Ukraine war, are worrying. The volume growth for non-petroleum exports slipped to 7.6% y-o-y in February (3-month moving average) from the recent peak of 9.4% y-o-y in November last year. While nominal export may hold up due to higher prices, a tapering off in volumes—which could get exacerbated as global demand slows—is bad news for the labour market.

Unfortunately, there isn’t much the government can do to stimulate demand given the sharp rise in its expenses on food and fertiliser subsidies, as also on welfare schemes. Any additional spends by way of a stimulus would need to be met from market borrowings—already high at a gross `14.5 trillion—which would only push interest rates higher. One way to minimise the pain for consumers would be to trim excise duties on diesel as had been done last October. While this might come at the cost of a cut in capex, it would certainly help rein in inflation and reduce the erosion in demand. Expanding the Budget would not be desirable at this juncture as the tax collections might be less buoyant than in FY22. Rather banks, which have been capitalised by the government at the cost of the taxpayer, should be prodded to lend more, especially to mid-sized and small firms. Easier credit at affordable rates is needed to support businesses and stimulate demand. Else, the reality will be a GDP growth print that is much closer to RBI’s 7.2% estimate rather than the IMF’s 8.2%. The tag of the world’s fastest-growing economy would then be just a small consolation.

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