There isn’t a single news programme or article on the global economy these days that doesn’t mention recession. This has been so for the past many months, but as central banks – especially the US Federal Reserve – keep raising interest rates to combat inflation, the prospect of a recession draws ever nearer. In their latest economic updates on the global economy, both IMF and the World Bank have forecast a significant slowdown of the global economy. And as I mentioned in a previous blog post, bankers seem to be of the view that most of the developed world will be in a recession that is likely to last a year or so.
In such a scenario, the possibility of a 7% GDP growth for India for FY23 seems to be a ray of hope and growth in an otherwise gloomy world economy. In fact, India’s June 2022 quarter GDP growth was a surprisingly perky 13.5% that came on top of a 20.1% growth in the same quarter the previous year, and it was attributed to a strong revival in services. That said, I must mention that with the previous years’ positive base effects wearing off, we ought to expect a considerably slower rate of growth this year and the next. In fact, several banks and rating agencies have already started lowering their growth forecasts for India to below 7%, while the RBI has itself lowered its GDP forecast to 7% from a previous 7.2%. IMF’s latest forecast is 6.8%, while the World Bank’s is 6.5%.
It isn’t the estimates of GDP growth that should concern us, as the underlying factors determining that growth. In 2022, India’s industrial production did show a reasonable recovery, but unfortunately, it seems to have nosedived in the latest reading for August 2022. The IIP reading of -0.8% was due to a contraction in manufacturing and mining, but as you will see in this Economic Times article, it is also due to a base effect of a high IIP reading for August last year. Manufacturing hasn’t contracted that much, though the reading for consumer durables and non-durables have, at -2.5% and -9.9% respectively. What I find shocking is the contraction in consumer non-durables, by which we mean consumer packaged goods, which usually stays resilient even during slowdowns and is never ever that volatile. However, I have noticed such wild swings in these numbers for many years now, and I think they are suspect. What might have caused these to contract so much; was there too much inventory build-up, for example?
Consumer price inflation came in at a higher 7.41% for September 2022, when it was expected to slow down in response to RBI’s rate increases. Most of it was attributed to food price inflation, but the fact remains that even core inflation has been stubborn at levels around the 6% mark. And this has been the case for over a year now, so clearly it is higher commodity costs including fuel, and services inflation, that are the main drivers of core inflation.
Assuming that RBI’s rate hikes do take effect later this year and the next, what impact might it have on consumption and investment? Yet another corporate earnings season has just begun and too few companies – India’s tech majors and a few banks – have reported earnings so far, to draw any conclusions. India’s tech companies have done reasonably well, reporting good growth in revenue and profits, and have also seen growth in new clients. However, their EBITDA margins are under pressure when you look at them year on year and that might be cause for concern. Another concern would be how the global slowdown might affect their businesses, since a sizeable portion of their revenues are generated overseas.
With banks, it appears from the few that have reported earnings this season, that their interest income and profits have grown; the former due to rate increases and the latter because of lower provisions for bad loans. If it is an indication that India’s many-years-old, non-performing loans problem is eventually getting resolved, it would provide great relief to the Indian economy at a macro level and would also assure investors of India’s long-term potential as an investment destination.
From the surge in India’s automobile sales in September 2022, especially of passenger cars, it appears that festive season sales have been good, and one hopes that the momentum will continue. There is a particular increase in the sales of electric cars that India has been witnessing in recent months and while that must be cheered, it comes with a caveat: that more of India’s power generation ought to come from cleaner fuels like natural gas, and renewables. The global chip supply issues too seem to be getting resolved according to Indian auto manufacturers, and the aim is to also develop and manufacture them locally.
So far, so good. According to Ruchir Sharma who wrote in the Times of India recently, there are seven countries that are bright spots in the global economy, that he calls the seven wonders of the world, and India is one of them. Some of the countries might surprise you: Greece and Portugal, for example. While I do think that India is in a much better position than many other economies around the world, I would caution against complacency and overlooking signs of any weakness. Being a large and populous country, with millions of poor, India faces pressures that many other countries don’t, save China.
Where might there be any dangers lurking that we should watch out for? Especially, given an environment of high interest rates, a stronger dollar, and high oil prices. I would say that after two years of managing the Covid-19 pandemic, and then faced with the impact of the war in Ukraine, our fiscal deficit had ballooned to never-before levels at 9.7% in FY 21. This, when we didn’t resort to any huge fiscal stimulus to households or business, but provided free foodgrain to the poor and emergency credit line guarantee to small and medium businesses. The target for reduced fiscal deficit is still at elevated levels of 6.5% for FY23 and with the government having to increase fertilizer subsidy thanks to the Ukraine war, as well as higher oil import bills with a weaker rupee, the spending is at high levels. Which means the government will have to prune its much-promised capex spending towards the latter part of the year. The good news is that the pandemic is also under control, with numbers of new cases falling. And on the fiscal front, the positive news is also that tax revenues (both direct and indirect) have been buoyant.
The other worry is India’s current account deficit, what with rising import bills, a widening trade deficit further exacerbated by the prospect of slowing exports as the global economy slows, an ever-strengthening dollar and capital outflows as investors flock back to the US in response to rising interest rates. Our external vulnerability is not as much as in the Asian Financial Crisis, but economists have forecast that India’s CAD will rise to as much as -3.5% or even -4.0%.
Well, we have much larger foreign exchange reserves, you might say, and while that is true, it is also a fact that it is down by around US $100 billion already in trying to steady the Indian rupee. Related to this is also our external debt, especially our external commercial borrowings. This has been rising steadily, and the share of short-term debt with maturity of up to one year has increased to 21% by June 30, 2022, according to the RBI. Besides, within total external debt, the share of corporate non-financial companies’ debt is as high as 41.3%, valued at US $ 254 billion on June 30, 2022. As the largest component of our external debt, Indian corporates also have most of it – 60.6% – coming due within a year. With a weakening rupee, it makes their debt repayment that much more challenging.
However, not all companies will face these problems. Just recently, it was reported that Reliance plans to raise more money from overseas borrowing to finance its 5G telecom plans. A company such as Reliance will not have a problem repaying foreign debt; indeed, thanks to tax cuts and companies repairing their balance sheets, it was recently reported that Reliance is debt-free. But one cannot say the same of many companies smaller in size and with less deep pockets, who feel pressured to borrow overseas because even in a rising rate environment, interest rates are lower elsewhere. It is being reported that RBI recently increased these overseas borrowing limits to US $ 1.5 billion, as yet another measure to try and save the Indian rupee.
And while external vulnerabilities as well as the fiscal situation are legitimate concerns, so is India’s high unemployment. I keep coming back to this issue as it is now a chronic problem with our economy which, together with high inflation, poses serious threats to economic growth. According to CMIE (Centre for Monitoring the Indian Economy) the overall unemployment rate for India for September 2022 was 6.43%, lower than 8.28% for August 2022 and while that sounds like a big improvement, it might prove short-lived as the 30-day moving average for unemployment on October 16, 2022 is already at 7.84%. This, with an alarmingly low labour force participation rate of around 40%; imagine how much higher the real unemployment rate would be, if more people were in search of work. As I have written before, the situation of women in India is so much worse.
This has to go down as India’s greatest long-term challenge, and deserves as much attention as poverty alleviation or improving education and skills. In fact, such long periods of high unemployment can actually worsen the poverty situation.
This is India’s biggest deficit, and greatest lurking danger, so let’s start doing something about it now.