Head still above water

Sushma Ramachandran

Senior Financial Journalist

THE famous opening lines of Dickens’ A Tale of Two Cities are often used to describe days gone by — ‘It was the best of times, it was the worst of times.’ In the current year, it has been a case of the worst of times — the pandemic years of 2020 and 2021 — followed by pretty bad times. With Russia invading Ukraine in February, the stage was set for a tumultuous period, not just for Europe, but for the entire world. The war set off a chain reaction of events that impacted even countries far away from these developments. The many predictions that 2022 would see a gradual return to normalcy for global economies battered by the lockdowns of the Covid virus did not come true. Far from normalcy, the disruption in global supply chains caused by the events in Ukraine led to a slowdown in economic growth in most countries.

Despite ending 2022 on a higher growth path than much of the world, India remains in difficult territory. An emerging economy needs to run much faster to catch up with others.

For India, the year had actually begun with the third Covid wave that spread rapidly across major cities. But it was already waning by the end of January and both the milder form of the virus and widespread vaccination meant hospitalisations were far lower than before. No wonder then that the Budget was a hopeful one with the focus on big spending on infrastructure in a bid to overcome the slowdown of the pandemic years. All calculations were based on the assumption that world crude oil prices would rule at around 70 to 75 dollars per barrel, based on the premise that the market would not bear a higher cost.

The Ukraine war threw many of these assumptions out the window as oil prices rose to a peak of $130 per barrel initially and then moderated to about $100 a barrel. This was one of the key factors in pushing inflation much higher than expected for the year. It was compounded by the rise in commodity prices owing to disruption in global supply chains due to the conflict in Europe. Prices of key metals and components needed for manufacturing industries here shot up while the stoppage of sunflower oil imports from Ukraine pushed up retail prices, creating hardship for the general public. Food inflation in general contributed to nearly half of the price spiral.

In this backdrop, with rising headline inflation, the central bank was forced to abandon its accommodative monetary policy. Inflation touched around 7.8 per cent in April, pushing the Reserve Bank of India to begin hiking interest rates in a bid to bring it within the tolerance band of 2 to 6 per cent. It has so far hiked interest rates four times this year and the latest data shows the strategy has worked to some extent, with inflation having cooled to 5.88 per cent in November.

But India has been better off than many other countries as far as inflation is concerned. Western economies began facing inflationary spirals at 40-year highs after the disruption caused by the Ukraine war. The US, the UK and many European economies, for instance, are struggling to cope with inflation ranging from 8 to 11 per cent. This has been the trigger for aggressive rate hikes by central banks, including the influential US Federal Reserve. The resulting flow of funds from the Indian stock markets to western shores led to extreme volatility that shook domestic investors who had gained from a prolonged bull run during the pandemic. But here, too, the worst of times eased up slightly as domestic investors shored up markets with their faith in the country’s economic recovery process. So the withdrawal of foreign institutional investors has not been as worrying as in other emerging economies. Volatility continues in response to geopolitical developments like internal unrest in China over the zero-Covid policy but markets have been recovering quickly from such news.

The uncertainty created by global supply disruptions led to slowdown in some industrial segments by mid-2022, leading to most rating agencies downgrading GDP growth projections for the year. Even the government has moderated its expectations. From an optimistic level of 8 to 8.5 per cent growth projected in the Economic Survey for 2022-23 in January, the government is now anticipating a far lower level of 7 per cent, slightly higher than the central bank’s projection of 6.8 per cent. This gives India the tag of the fastest growing major economy. But it is just not enough for a developing economy that needs to slough off poverty. The country has not been able to revert to the growth path achieved prior to the pandemic and is estimated to have grown by only about 3 per cent over the past three years.

At the same time, in comparison to the rest of the world, India stands out on several counts. It has managed to overcome the impact of geopolitical events, high inflation and rising interest rates without a steep downturn in economic performance. One reason is robust domestic demand. But the external environment has taken a toll on exports. These have decelerated in line with global recessionary trends and a fall in demand. Similarly, the rupee has depreciated making imports more expensive, especially crude oil which has been ruling at around $100 per barrel for much of 2022. A consequence is the widening of the current account deficit which could cross 3 per cent of the GDP in the current fiscal as against only 1.8 per cent in the previous year.

The net result is that despite ending 2022 on a higher growth path than much of the world, India remains in difficult territory. An emerging economy needs to run much faster to catch up with the others. The World Bank says India has to grow by at least 8 per cent annually if it wants to become a developed country by 2047. This goal looks way in the distance right now. Right now, it has managed to avert a drastic fall in growth over the past 12 months despite battling persistent global headwinds. This is the only comfort it can take as it gets set to face fresh challenges in the New Year.

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