Headwinds ahead, yet no huge worries

IMF’s April World Economic Outlook (WEO) has projected a decline of the global growth from 3.4% in 2022 to 2.8% in 2023. Although, it is likely to improve to 3% in 2024, the same would be substantially lower than the 6.4% growth achieved in 2021. IMF also projects global trade volume to fall from 5.1% in 2022 to 2.4% in 2023 and improve slightly to 3.5% in 2024.

Prudent policies pay off well

Meanwhile, the Indian economy continued to outperform others and may register seven per cent growth, higher than those of major economies. This has been made possible by the prudent fiscal policy followed by the Union government, prioritising substantial capital expenditures on infrastructure, both at the central and the state level, prudent allocation of expenditure on productive use which has a multi-flyer impact on economy.

Capex grows up

The capital expenditure during April-February 2023 was 21.7% higher compared to the corresponding period of the previous year. This has led an improved spending quality, which is reflected in the declining revenue expenditures to capital outlay ratio over the past years. The Centre has projected Rs 10 lakh crore capital expenditure in Budget FY 2024, which is 33 per cent higher than the previous year (3.3% of the GDP). This will help India sustain economic growth when the world economy is adversely affected by tightening inflation, slow growth and supply chain disruptions.

Inflation offset

The Centre has continued to support States’ capital expenditure impetus by extending its 50-year interest-free loan with an enhanced outlay of Rs 1.3 lakh crore. The State’s Monthly Fiscal Accounts data shows that the capital Expenditure by States was 11.9 per cent higher compared to the previous year.

Gross tax revenues registered an increase of 12 per cent with a robust expansion under all major taxes, except excise duties. This has helped the government meet its fiscal deficit target of 6.4 per cent of the GDP on FY 2023 despite several fiscal measures like fuel tax cuts and extension of the food subsidy programme to offset the impact of rising inflation.

On the external front, India had a reasonable growth of 13.84 per cent in FY 2022-23 over FY 2021-22 in merchandise exports and service exports. Merchandise exports are at $447.46 billion in 2022/23 as against $422 billion in 2021-2022 exports, you will find that trade excluding petroleum and gems & jewellery during FY 2022-23 has remained static on the exports front whereas in the same period imports increased substantially.

Headwinds for global trade

The threat of deglobalisation and supply chain disruptions due to continued geopolitical tensions added by slow global growth and trade, is expected to have a negative impact on India’s global trade in the near future. However with the diversification of destinations for trade, widening the reach, bringing new quality products than high Indian branded products, the government’s focus on Free Trade Agreements with new potential countries like UK, and the thrust from the Foreign Trade Policy 2023 should help India to continue to excel in merchandise and services exports this year too with moderation in imports.

Data released by the RBI show that current account deficit (CAD) narrowed to 2.2 per cent of the GDP in Q3 of FY 2023 compared to 3.7 per cent in Q2 and 2.7 per cent in the corresponding quarter of the previous year. India’s CAD, which is the difference between the inflow and outflow of foreign exchange, has narrowed to $18.2 billion in Q3 FY 23 from $30.9 billion in June quarter FY 2023 and $ 22.2 billion in December quarter of 2021.

Comfortable level of forex reserves

The forex reserves stood at $584.755 billion for the week ended April 7, 2023. The reserves had reached an all-time high of $645 billion in October 2021.Due to global uncertainties, India had earlier faced lot of outflow of Portfolio Investments, which has shown positive inflow in recent months. Similarly, RBI had to use the Forex Reserves in view of the volatility in exchange rate thereby depleting the Reserves. However in the recent period, forex reserves has shown positive flows, which led forex Reserves jump by $6.3 billion to $ 584.755 billion for the week ended April 7, 2023.

Going forward, India’s trade deficit may further fall as PLI schemes deepen their impact and reduce the country’s import dependence. At the same time, India’s recent engagements with UAE, the UK, and Australia and the new Foreign Trade Policy will increase the global market share of the country’s exports.

In periods of huge volatility, RBI’s continuous focus on building up forex reserves to meet unforeseen situations worked well during the recent upheavals in global market. Commodities prices globally showed huge volatility in the recent past and it is necessary that we keep enough cushion in forex reserves which necessitates promoting foreign direct investments, portfolio investments, NRI onward remittances, service exports remittances and reducing trade deficit.

India has also managed well in terms of fiscal policy during Covid-19 and thereafter as compared to elsewhere in the world. This has helped India to recover quickly from the negative GDP growth and come back in terms of stability in economic growth in FY 2021-22 and FY 2022-23. Despite the global economic uncertainties, India is expected to show a growth of 7 per cent in FY 2023. With the moderation in inflation, better monsoon prospects, good agricultural food production, strong financial and banking system and projected fiscal deficit of 5.9 per cent for FY 2023-24, India is expected to repeat its economic growth in 2023-24.

In its April 2023 bulletin, the RBI said global economic conditions are beset by heightened uncertainty as financial conditions remain volatile and financial markets are on edge. In India, aggregate demand conditions remain resilient, supported a rebound in contract-intensive services.

Union Finance Minister Nirmala Sitharaman said “a conducive domestic policy environment and the government’s focus on structural reforms have kept India’s economic activity robust.”

In conclusion, we have to be watchful of the global headwinds, uncertainties, slower global economic and trade growth. At the same time, we have to focus on strong fundamentals, attracting more FDI, providing a favourable ease of doing business, continue PLI , enhance infrastructure spending and encourage private Investments, promote savings, with renewed vigour on exports to keep the drivers of growth. At the same time, the growth should result in enhanced per capita income and upgrade living standards.