Ours is the fastest growing major economy: How come?

We need to interpret this respected title with care as there is still much to be done

The statement made in various conferences and investor calls is that India is the fastest growing economy today at 7%, and while the country will sleep in recession, we will wake up and have many opportunities to improve. The tone taken is one of pride and schadenfreude. Are we really in this sweet spot? Are we really disconnected from the world?

In terms of numbers, there is no competing with numbers, just as our economy has grown exponentially in 2017-18 without making money. Also, going by many forecasts, including those of the International Monetary Fund, growth will slow in 2023-24, but it will be in the range of 6-6.5%, which will be higher than in all major economies. So, India’s growth story will be a winner all the way. What is interesting about our 7% growth forecast for 2022-23 is that our economy will slow down in the second half of the year. If one goes by the Reserve Bank of India (RBI) estimates, we see the sequence slow down from 13.5% in the first quarter to 6.3% in the second, and then 4.6% each in the third and fourth quarters. The last two quarters will be disturbing because in 2021-22, growth was 5.4% and 4.6%, which should have provided a lower numerical base for higher growth this year. But this will not be the case, that is why it is necessary to examine what is wrong with our economy.

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The first issue relates to a company’s profitability, which shows how inflation has affected balance sheets. The results of the second quarter show a strong growth picture in the sales of non-financial companies up to 25-30%, thanks to the closed demand. However, almost universal income has decreased and the reason is that companies have seen a high growth in input costs that cannot be fully passed on. This means that the crisis will continue throughout the year, as inflation will remain high for the next 3-4 months. The solution is to keep working to reduce inflation.

Second, the data also show that higher inflation (and its mirage of higher consumption) has had a negative impact on savings, which have come under pressure this year. In 2021-22, savings has declined according to RBI data. The fact that the application is stable, generates good GST collections and increases the quality of the company, is a cost saving. It’s the effect of inflation again. This is not good news, because banks are facing the challenge of slow growth in deposits compared to credit. We need to stimulate savings through appropriate tax incentives. A decline in savings also means we will have a larger current account deficit (CAD), which is defined post-post as the difference between savings and investment. This deficit could be in the region of 3-3.5% of GDP in 2022-23.

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Third, exports have been affected by the economic downturn in the West. Textiles, engineering, jewelry, chemicals, etc., are other sectors that have been severely affected by the slowdown, as demand has come under pressure from a combination of low growth in the West and high inflation that is hurting our exports. While inflation will decline in the West again next year, recession-like conditions will continue. Therefore, exporters should be prepared for long periods of neglect. We need to think differently and look hard at the composition and destination of our exports.

Fourth, a lazy West is a red flag for the software industry. We are already seeing layoffs at Big Tech companies that will be reflected in outsourcing. This is important because both software inflows and outflows support our current account. Our trade deficit will certainly widen, as with 7% growth, import demand will remain strong. Exports will remain low until the global economy recovers. Annual software receipts of more than $120 billion in the past supported our current account, but the slide here will be difficult to prevent.

Fifth, as India’s finance minister pointed out, the cycle of private investment must continue. The picture so far is that it is concentrated in a few sectors, such as steel and telecom, and not broadly based. Extensive recovery may take time.

Sixth, consumption growth may be a laughing stock supported by inflation, as many consumer goods retailers have pointed to low rural demand as a concern. Kharif production will be lower in rice and pulses this season, which will impact farmers’ income. Therefore, one should be careful when interpreting the signs here.

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Seventh, the employment question is still pending. There is an ongoing debate about whether it is increasing or not. The fact that many new age firms, especially startups, have gone bankrupt is bad news. After covid, many companies have adopted technology for routine procedures. Now with profits under pressure, jobs may be at risk even at home. We want more openness in the skilled market, instead of a job offer at the lower level, to keep consumption marked.

While we have ambitious goals to join the global supply chain, being far from that has helped us at this time, as ours remains the fastest growing economy in the world. This epithet will not hold unless India’s growth is linked to the wealth of other countries. Currently, only the foreign portfolio and direct investment are exposed to external factors, while exports are a growth driver.

In conclusion, we need to interpret the title of ‘booming economy’ carefully. There is still a lot to be done by the government and the RBI in providing the right policy environment. But the steering wheel will be in the hands of private investors.
Source: Livemint


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