The economy is losing momentum

India will need to adjust to slowing global trade

The latest projection by the World Trade Organization (WTO) strengthens the view that evolving economic and geopolitical conditions would dampen global trade. Global merchandise trade volumes are expected to lose momentum in the second half of the current year and slow further in 2023. While growth in merchandise trade volumes is expected to be at 3.5 per cent in 2022, it would moderate to about 1 per cent in 2023. This is significantly lower than the earlier estimate of 3.4 per cent growth. A number of reasons can be attributed to this expected slowdown in trade. In Europe, for example, high energy prices are affecting household budgets, denting demand for other goods. A sharp slowdown in China can put enormous pressure on global trade volumes. Further, a number of developing countries are struggling with higher food and fuel prices.

The global economy is also expected to slow, partly because of central banks’ action to contain high inflation, which would put downward pressure on global trade. Central banks in advanced economies — particularly the US Federal Reserve — are expected to continue to increase interest rates to contain inflation. The WTO expects the global economy to grow 2.8 per cent in 2022 and slow to 2.3 per cent in 2023 — about 1 percentage point lower than the earlier estimate. Besides the near-term headwinds, the ongoing structural change in the nature of trade could also affect growth. There is pressure on both governments and corporations to de-risk supply chains through diversification. While this may make supply chains more resilient over time, adjustments in the interim could affect global trade and growth.

Indian businesses would need to adjust to the changing global trade environment after having a good run on the exports front. The latest trade numbers, for instance, point to early signs of change. The value of merchandise exports declined 3.5 per cent in September year-on-year. As expected, exports in some sectors went down because of slowing global demand. Exports of cotton yarn and handloom products, for example, declined by over 40 per cent, while shipments of engineering goods, which were a significant driver of export growth in recent times, slipped by about 17 per cent. Since Indian exports are very sensitive to global growth, a slowdown in the global economy or a recession in advanced economies could have a disproportionate impact. India’s imports have also moderated in absolute terms. However, the ongoing recovery is likely to keep imports elevated, which will push up the current account deficit.

Given the global trade and economic conditions, managing India’s external accounts could become challenging. The Organization of the Petroleum Exporting Countries, along with its allies, has decided to reduce crude oil production to support prices. This will not allow India’s oil import bill to come down as some analysts were expecting. According to the Reserve Bank of India’s latest professional forecasters’ survey, the overall balance of payments would be in deficit to the extent of $57.6 billion in the current year, which will put pressure on the currency. Policy response would thus need to be adjusted, including in the area of currency management, to India’s external position and global trade outlook. India’s foreign trade policy, which is in the works for some time now, will need to acknowledge all emerging challenges.