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The impact of decelerating global growth on India

Photo: ReutersPremium
Photo: Reuters

With global economic prospects worsening significantly due to the Russia-Ukraine war and the International Monetary Fund (IMF) forecasting a decline in global growth, Mint examines its impact on the Indian economy.

With global economic prospects worsening significantly due to the Russia-Ukraine war and the International Monetary Fund (IMF) forecasting a decline in global growth, Mint examines its impact on the Indian economy.

What does the IMF say?

In the World Economic Outlook, April 2022, the IMF slashed global growth projections from 6.1% in 2021 to 3.6% in both 2022 and 2023. Reasons ascribed include the Ukraine war that has resulted in considerable economic damage coupled with worldwide spillovers through commodity markets, trade, and financial channels. Elevated inflation levels are another looming challenge complicating the trade-offs that central banks are faced with—between containing inflation and boosting economic growth. The war and lockdowns in China have worsened supply disruptions, narrowing the limited fiscal space that countries are wrestling with

What will happen to India’s export target?

Having achieved the milestone of over $400 billion of merchandise exports in FY22, the country is aiming for an ambitious export target of approximately $800 billion for both goods and services (about $450-480 billion for goods and $350 billion for services) for the next year, nearly 19.5% higher than that achieved in 2021-22. With India’s major market destinations like the US and Europe expected to see slower growth of 2.3% in 2023, it would adversely impact export demand. Export of goods to the US and Europe for the April-February 2022 period clocked $68,450 million and $75,972 million, respectively

Economic headwinds
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Economic headwinds

What is the likely impact on economic growth?

Exports, which contribute approximately 20.9% to the gross domestic product (GDP), are a key constituent of India’s growth engine and shrinking demand will have its bearing on economic growth. Also, the import cost of crucial raw materials like crude oil is expected to increase, thereby pushing the economy towards cost-push inflation.

What is the broader signal  for  the  economy?

Though India is expected to be the fastest growing major economy, the projection underlines the growth rate decelerating as compared to FY22. As per IMF’s projections, India is now expected to grow at 8.2% in FY23 and 6.9% in FY24 (lower numbers than its January 2022 projections), which is not hugely disturbing. However, it is also important to bear in mind that with the Indian government’s borrowing expected to rise, fiscal deficit as a percentage of GDP is bound to widen, resulting in an high interest payments burden.

What is the likely opportunity for India?

If the US economy decelerates to 2.3% in 2023 (as per IMF), the Federal Reserve might be compelled to re-think the scheduled interest rate hikes (an outcome of high inflation in the US). If that happens, US portfolio investors are likely to be net buyers in the Indian capital markets. Increased net inflows will also strengthen the Indian rupee apart from causing an increase in market capitalization, in turn boosting the confidence of both domestic and foreign investors.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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