Prospects for global growth this year and next have progressively been revised downwards. The International Monetary Fund (IMF) expects global GDP growth at 3.2 per cent for 2022 and 2.7 per cent for 2023 (WEO October 2022), revising down the projections for 2023 by 20 percentage points compared to the July 2022 Outlook. Starting with the Russia-Ukraine crisis, the commodity price shock, aggressive monetary tightening by the US Fed and other large central banks, spiralling energy prices in Europe, disruptions caused by China’s zero-Covid strategy, have dealt one body blow after another on global economic outlook. The prognosis for the next year is not too good either, with recession/stagflation-like risks strengthening.
Unsurprisingly, the incoming data from the key global economies does not look very promising. The world’s largest economy – the US is facing the prospects of a stagflation, described as a scenario of falling growth along with multi-decadal high inflation levels. The US Federal Reserve has raised the key policy rates by a cumulative 375 basis points this year so far in a bid to tame inflation. Other major central banks, including the European Central Bank, have adopted a similar hawkish stance. This has caused volatility in global financial conditions, including a rise in US Treasury yields, sliding global equity markets, and depreciating currencies across advanced and emerging economies.
Our once fancied neighbour China too finds itself in economic dire straits. Its fanatical zero-covid policy has led to prolonged lockdowns in the biggest cities, ports and manufacturing hubs. It grew by a paltry 0.4 per cent on annual basis in the April-June quarter before recouping to 3.9 per cent in the subsequent quarter, due to a massive collapse in its real estate sector apart from production snarls due to intermittent lockdowns. This has prompted the World Bank to cut its growth forecast for China to 2.8 per cent for the current year from the previously forecasted 5.0 per cent growth rate.
Amidst this heightened global uncertainty, India remains in a sweet spot with growth rates expected to be in the order of 7 per cent+ in the current year. That said, we are certainly not decoupled from the global economic turmoil.
The factors underlined above pose spillover risks to India’s macros: slowdown in global growth is already reflecting in export slowdown, which poses downside risks to India’s growth prospects for the current year. While the coming off the crude oil price from their recent highs will have a sobering impact on India’s import bill, a greater slowdown in exports due to tepid external demand vis-à-vis imports, is expected to exert a widening pressure on the current account deficit this fiscal.
Furthermore, volatility in global financial conditions, across assets (equity, debt, rates), is showing its effect domestically too, with equity indices sliding, yields rising, and rupee falling. The rupee has depreciated by over 7.0 per cent in the fiscal so far buffeted by headwinds from tighter global financial conditions, risk-off sentiment, and a strengthening US dollar. A depreciating rupee raises risks of imported inflation, offsetting some gains from the recent fall in international commodity prices. The RBI’s interventions in forex markets to limit volatility in the rupee, have led to the drawdown of reserves.
Nevertheless, even as multiple global risks are hovering on the horizon, much will depend on how we navigate these challenges, with the government expected to continue with the bulk of the heavy lifting, mainly in terms of infrastructure, as well as spend on welfare measures, to support the rural and informal economy.