Home / Opinion / Views /  India’s economy can readily ride out a global slowdown

In January this year, the world economy was just about poised to recover from the ravages of the coronavirus pandemic. The Russian invasion of Ukraine in February put to an end all hopes of a global recovery. The Chinese government’s policy of stringent lockdowns to contain continuing outbreaks of covid was like rubbing salt on a wound. Global output contracted in the second quarter of the year due to downturns in Russia and China as well as virtually stagnant output in the US. Rapidly deteriorating growth prospects throughout Europe have ignited a debate about the possibility of a global recession during 2022 and 2023.

With no signs of a ceasefire, Western nations have continued in their efforts to cripple the Russian economy by levying a broad range of sanctions. But these measures have had negative effects on their own economies too. Economic heavyweights such as Germany are heavily dependent on Russian energy exports because Russia produces nearly a fifth of global natural gas and a significant amount of oil too. Its energy exports provide the power required by European industries. Russia is also an important producer of several metals. It supplies a tenth of the world’s production of aluminium and nickel. It is also an important supplier of other raw materials. Further, the closure of Russian airspace has hindered high-value air freight traffic. All these have caused large scale disruptions in global supply chains. Europe’s relatively advanced economies have slowed down because of shortages in energy and industrial raw materials.

All countries importing grains have also experienced large inflationary pressures because Ukraine is a major exporter. The level of inflation has more than doubled in Eurozone, shooting up from less than 3% to well over 6%. A similar scenario was witnessed in the US. Very high rates of inflation have caused central banks to implement a synchronized wave of large bouts of monetary tightening to curb prices. This should succeed in dampening inflationary pressures over the course of 2023. However, the cost is likely to be a significantly sharper reduction in rates of growth than would have occurred otherwise. Global growth is projected to slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January. Beyond 2023, global growth is forecast to decline to about 3.3% over the medium term.

How will the global slowdown in output affect the Indian economy? By all accounts, India will be the world’s fastest-growing large country. Most pundits estimate that India will grow at around 6% during 2022-23. Of course, the Indian economy is not completely isolated from the world’s. In fact, the current estimate of 6% is significantly lower than earlier estimates of 8% or more, the difference being the negative effects of the global slowdown.

It could have been much worse. Fortunately, the sectoral composition of the Indian economy has helped in reducing the impact of global supply-chain disruptions. The services sector dominates the Indian economy by far, contributing over 50% of gross value added, while the manufacturing sector contributes less than 20%. Since disruptions of the global supply chain affect the manufacturing sector significantly more than they affect other sectors, the overall impact on the economy has been lower.

What could have been disastrous for our economy was the huge increase in energy costs following the Russian invasion of Ukraine. India is particularly vulnerable to oil shocks, since it imports over three-fourths of its energy requirements. Luckily, India has been able to strike a deal with Russia and has started importing large quantities of oil from Russia at reasonable prices. In this case, Western sanctions on Russia have actually helped India since Russia was hard pressed to find large customers other than China. At any rate, oil imports from Russia now account for a fifth of overall Indian oil imports. There may be attempts from Western countries to place restrictions on these imports since a price cap has been imposed on Russian oil as part of the overall sanctions. So far, India has resisted all such attempts.

One consequence of the global slowdown, of course, is a reduction in demand for Indian exports. There has been a fall in exports of several items, including engineering goods, petroleum products, gems and jewellery, and textiles. Luckily, the impact on the overall rate of growth has not been disastrous so far, since exports constitute less than a fifth of our economy. Potentially more dangerous is that India may be importing inflation because of high prices abroad of a whole range of goods that India does import. This, combined with domestic pressures, has resulted in very high rates of inflation. The Reserve Bank of India has been forced to raise interest rates to contain the price rise and this may turn out to be a big constraint on future growth.

In times of global distress, it is natural to argue that the partial decoupling of the Indian economy from the world economy is a blessing, since it ensures that the domestic economy is insulated from the world economy. However, it should be kept in mind that this also prevents us from capturing much of the benefit when the world economy is booming.

Bhaskar Dutta is distinguished university professor of economics, Ashoka University.

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