Indian economy looks better than others, but don't raise a cheer just yet

The comparative numbers spell bad news for the world rather than any good news for India, whose growth forecasts are getting tempered even as the inflation picture is getting worse, writes T N Ninan

The Indian economy, however troubled, looks better than almost any other. Start with prices. Consumer price inflation in the US is at 8.5 per cent, a 40-year high. In the euro area, it is 7.5 per cent. These are economies used to inflation averaging less than 2 per cent. Here in India we may groan over rising petrol and diesel costs and some spectacular price tags on individual food items. Lemon prices, for instance, have been reported as high as ~300-350 per kg in some wholesale markets. Naturally, criticism of the Reserve Bank has grown for not having placed greater emphasis much earlier on controlling inflation, which is now well above the target range. Still, India’s consumer price inflation is moderate at fractionally under 7 per cent. Compared with the Brics economies, Brazilian inflation is in the double-digits at 11.3 per cent, as is Russia’s at 16.7 per cent. Only China has the inflation beast virtually slain, breathing slowly at just 1.5 per cent. (All numbers are as compiled by The Economist.)

 
The comparative picture is even better when it comes to economic growth. India tops the forecasts for 2022, at 7.2 per cent. China comes the closest among the large economies with 5.5 per cent, while the US and the euro area are naturally lower at 3 and 3.3 per cent, respectively — the advanced economies tend to grow slower than those tagged “emerging”. Regardless, Brazil is stagnant and Russia is headed for deep trouble with a projected 10.1 per cent shrinkage of its gross domestic product (GDP). Japan on its part has low inflation with modestly accelerating growth.
 

The comparative good news for India doesn’t stop there. The inflation challenge confronting the RBI may be easier to tackle since the required moderation in India is less than in the advanced economies. Two other positive elements in the picture are the exceptional performance on tax collection (achieving among the highest tax-GDP ratios in recent years) and on exports. Confidence in the country remains high. The rupee has been one of the more stable currencies, dropping against the dollar by just 1.4 per cent in the last 12 months. Other than the yuan, the only currencies to have gained against the dollar belong to oil exporters: Brazil, Indonesia, and Mexico.

 

How long can the good news last in the face of visible headwinds? The rupee could wilt if oil prices stay high. More importantly, the 3 per cent economic growth predicted for the US may prove optimistic. The inversion of the interest yield curve (sloping down over time rather than up) has led market observers to suggest that the world’s largest economy is headed for recession. The key question is whether the US monetary authority can calibrate interest rate hikes to control inflation without provoking a recession that, if it comes about, will impact all economies. If world trade slows, India’s exports too will lose bounce.

 
Even without that, the comparative numbers spell bad news for the world rather than any particular good news for India. Compared to a quarter ago, all growth forecasts for India have been tempered even as the inflation picture has got worse. The monthly production numbers remain modest while surveys show a dip in the business mood. Indeed, the RBI expects growth in the second half of 2022-23 to be no more than 4.1 per cent — with acceleration after that. Uncertainty is implicit in such forecasts.
 
There is little the government can do to improve the outlook, given its stretched finances, the repeated disruption caused by the pandemic, and now by the war in Ukraine. China, which has followed a zero-tolerance approach to Covid, has shut down its largest metropolis, Shanghai. It would be idle to think that there will be no fall-out on that country’s economy and indeed on the rest of the world — in parts of which yet another Covid wave seems to be building even as the war in Ukraine threatens to drag on, and possibly escalate. So, while it is great that India’s numbers look relatively good, don’t raise a cheer just yet. We live in a troubled world.