What doctor ordered for Indian economy: Demand revival

Amid global uncertainties, a crucial requirement would be a healthy recovery of domestic demand. Photo: Bloomberg
Amid global uncertainties, a crucial requirement would be a healthy recovery of domestic demand. Photo: Bloomberg


  • India gets hit by a global slowdown, and the linkages are only getting stronger. However, this time some macro factors favour India.

The Indian economy has been recording relatively healthy growth amid global turmoil. However, with global recessionary fears escalating, there are concerns over India’s economic recovery. The International Monetary Fund and World Bank have lowered India’s estimated gross domestic product (GDP) growth to less than 7% for the fiscal year 2022-23, with forecasts of a further fall in growth for 2023-24. While there is no denying that a global slowdown will have an adverse impact on the Indian economy, the crucial aspect is the severity of this impact.

In the past, we have seen that India gets adversely impacted by a global slowdown, and the linkages are only getting stronger with an entwining of trade and investment. However, unlike previous crisis scenarios, this time around there are some macro factors in favour of the Indian economy and that has been providing optimism on its ability to weather this global storm. With deleveraging over the past few years, the balance sheets of corporates are in a healthy condition. The median gearing ratio (total debt/equity) of the country’s top 1,000 listed companies as per market capitalization had reduced to 0.29 in 2021-22 from as high as 0.65 in 2012-13. Our credit ratio (number of upgrades/ number of downgrades) improved to an all-time high of 3.74 in the first half of 2022-23, as against 1.48 in the pre-pandemic period of the second half of 2018-19. The banking sector is relatively in good health, with its gross non-performing asset (NPA) ratio having fallen to 5.8% from a high of 11.5% in 2017-18. The strong fundamentals of the corporate and banking sectors are providing resilience to the Indian economy in midst of the current global turmoil.

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The other supporting factor has been India’s strong foreign exchange (forex) reserves, which had risen to over $640 billion by the end of 2021. This helped India withstand capital outflows this year, resulting in a sharp deterioration in reserves, as witnessed by other emerging economies too over the past few months. India’s forex reserves have fallen by about $105 billion in the year so far, pulling down the country’s import cover to 8.9 months. While this cover is higher than the 6.7 level touched during the Taper Tantrum of 2013, there is need for caution. The fall in forex reserves could get very disruptive going forward.

The sharp strengthening of the US dollar this year is causing havoc in other economies in the form of imported inflation and an increased external debt-servicing burden. India has relatively low external debt, with our external debt to GDP at 20% and short-term debt to forex reserves at a comfortable ratio of 0.2. However, corporates with unhedged forex exposure are at serious risk in these turbulent times. As per the Reserve Bank of India (RBI), around 44% of India’s external commercial borrowings (ECBs) are unhedged. However, this would include borrowings by entities that have a natural hedge in the form of dollar earnings. RBI is taking all precautions and has recently announced new guidelines that require banks to do additional provisioning for risks arising from unhedged forex exposure.

With global liquidity tightening and forex inflows to emerging economies reducing, India is also feeling a pinch in the form of tighter domestic liquidity. Domestic interest rates are rising at a time when there is strong retail credit demand (around 20% year-on-year), while credit demand growth from large industries remains low (about 6% year-on-year). The rise in interest rates will be an impediment for retail loans, including housing loan demand. However, as far as India’s industrial sector is concerned, investment plans would be more contingent on economic stability and the demand scenario, and will not be dented severely by rising interest rates. This is mainly because interest rates are rising from low levels and are not expected to rise very sharply from here on.

Yet, with global growth slowing, India’s economy will definitely feel the pain of lower external demand. India’s exports, which contribute around 20% to the country’s GDP, are already reflecting the pain. Data shows a contraction in India’s non-oil, non-gold exports over the last two months. With export growth slowing, India’s average monthly trade deficit has widened to $25 billion in the current fiscal year as against monthly average of $16 billion in 2021-22.

India’s trade deficit is estimated to widen to 8% of GDP in 2022-23 as against 6% the previous year. Moreover, with capital inflows slowing due to foreign institutional investor outflows, our balance-of-payments will be in the deficit zone in 2022-23. This in turn will have a bearing on India’s forex reserves. So, there are concerns over what lurks on India’s external front.

In a nutshell, we face global challenges in the form of slowing external demand, volatile commodity prices, rising interest rates and volatile currency markets. While India is better placed in this recovery cycle than earlier, it will definitely feel the pinch of the global turmoil. In the midst of all these global uncertainties, the most crucial requirement would be a healthy recovery of domestic demand and a pick-up in our private investment cycle.

Rajani Sinha is chief economist, CareEdge.

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