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Business News/ Opinion / Columns/  Surviving a VUCA effect: How to fare in a volatile and unpredictable world
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Surviving a VUCA effect: How to fare in a volatile and unpredictable world

As 2022 draws to a close, it is important to assess how the Indian economy has done, especially as it was a turbulent year

Surviving a VUCA effect: How to fare in a volatile and unpredictable worldPremium
Surviving a VUCA effect: How to fare in a volatile and unpredictable world

As 2022 draws to a close, it is important to assess how the Indian economy has done, especially as it was a turbulent year. As the RBI governor pointed out very recently, the world has been grappling with what is called VUCA—volatility, uncertainty, complexity and ambiguity. This has affected the global economy adversely with many advanced economies expected to face a recession in 2023 and could even spill into 2024. Monetary tightening among the advanced economies’ central banks has been faster and sharper than seen in recent history (at least post-1980s). With the Ukraine-Russia war, the global economic situation has worsened and appears to be dragging down the advanced and emerging market economies (EMEs) more deeply than was earlier predicted. Rebuilding of supply chains that got disrupted due to the pandemic appears to be stalled due to war. Worse, as a “closure" of all these drags, the widening of debt and deficits (both on the external and domestic accounts) appears to be looming heavily and equally on advanced and EMEs. Despite these strong global headwinds and their faster transmission effects, the Indian economy is still predicted to grow at over 6% this year and the next.

So what policies did India adopt differently compared with advanced economies (AEs)? And how to navigate further to mitigate the impact of expected recession in the AEs? Unlike AEs, India appears to have learnt lessons from post-2008-crisis policies and the after-effects on growth and inflation. As the pandemic led to the collapse of aggregate demand, AEs adopted ‘text book’ policies, as in post-2008, that led to unsustainable inflation and they are now staring at recession. But India was more pragmatic and adopted policies that helped in improving trend growth, while absorbing transitory shocks. Two important highlights of India’s macro policies that stand apart this time around are: better co-ordination between fiscal and monetary authorities, and focusing more on the government capex programme. Indeed India’s fiscal-monetary co-ordination appears to have become a global best practice and in a way is a ‘public good’.

But what about inflation, which breached RBI’s target rate for three quarters? Two things: compared with other AEs how wider is this breach in India and what led to such high inflation? Also, one needs to remember the nightmares of double-digit inflation post-2008. The peak inflation in India was 7.8% against a targeted 6% (compared with 9.1% against 2% target in the US). Further, a large part of India’s inflation is due to open-economy macro issues (transmission of international shock due to global fiscal stimulus and due to war impact) and much less due to domestic issues. With the available monetary space as well as using foreign exchange reserves, the RBI has been largely successful in navigating the economy through the global shocks. Added to this, the fiscal policy focus on capex indeed mitigated inflation expectations to a large extent while reviving medium-term growth potential. As we enter 2023 with some anticipated risks that continue to disrupt the global economy, India needs to retain policy space to address both anticipated and unanticipated shocks. On the fiscal side, continuation and scaling up of government capex strategy may be the need of the hour. However, while the Union government seems to have such space, state governments need hand-holding by the Union. On the monetary side, the rate hike cycle appears to be peaking with some unconventional policy measures unveiled to revive growth. However, one issue that could linger on is the sustainability of public debt, which appear to have crossed over 90% of GDP and this needs medium-term policies. As our earlier analysis showed, one sure way of addressing this is to revert to the original FRBM Act of 2003. Some analysts have described this as premature fiscal consolidation. But where they miss the point is that the fiscal policies adopted in the last two years are not very different from the FRBM Act that focuses more on expenditure switching from revenue to capex. And this is the only way to achieve a balance between growth, inflation and public debt in the medium term.

Another area that needs focus is exports. While global economic conditions do not suggest an exports revival, recent decline in exports growth is also to do with some domestic measures. Introduction of customs duties as well as exports tax to address windfall gains are some of those measures.

As India appears to be one of the most stable economies with prudent macro policies and with international investors looking for investment destinations, these trade tax measures may be re-looked at to attract more foreign investment. India is in a sweet spot to attract those foreign investments that are looking for medium to long term options and it is important to avoid missteps that disturb the momentum.

The author is the vice chancellor of Dr B.R. Ambedkar School of Economics University. Views are personal.

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Published: 26 Dec 2022, 10:00 PM IST
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