India is in a better position to navigate financial turbulence due to Fed monetary tightening compared to its situation during the “taper tantrum” episode after the 2008-2009 global financial crisis even though it remains vulnerable, the United Nations said in its "World Economic Situation and Prospects" report.
“This is due to a stronger external position and measures to minimize risks to bank balance sheets. In the medium-term, scarring effects from higher public and private debt or permanent impacts on labour markets could reduce potential growth and prospects for poverty reduction (in South Asia),” the report said.
The report produced by the United Nations Department of Economic and Social Affairs (UNDESA) said India’s monetary policies remain accommodative with interest rates close to record lows and liquidity measures still in place in most economies. “Yet the monetary cycle is gradually shifting as global financial conditions tighten and the recovery gains steam. The Reserve Bank of India has begun to taper liquidity by increasing the volume of reverse repo operations and the cash reserve ratio; it is expected to raise interest rates throughout 2022,” it said.
Accelerated global monetary tightening could increase volatility, trigger capital outflows and disrupt credit growth, especially in countries with elevated debt, large financing needs and high levels of foreign-currency-denominated debt, the report said. “Significant financial distress could emerge as highly leveraged firms face greater refinancing costs, particularly in sectors hit harder by lockdowns, even more so if the removal of forbearance measures uncovers a large deterioration in balance sheets,” it added.
The report projected Indian economy to grow at 9 per cent in FY22 and 6.7 per cent in FY23 as base effect wanes. “India’s economic recovery is on a solid path, amid rapid vaccination progress, less stringent social restrictions and still supportive fiscal and monetary stances. Robust export growth and public investments underpin economic activity, but high oil prices and coal shortages could put the brakes on economic activity in the near term. It will remain crucial to encourage private investment to support inclusive growth beyond the recovery. India has taken an important step by committing to 50 per cent of its energy mix coming from renewable sources by 2030 and to reaching net-zero emissions by 2070,” it said.
India’s fiscal deficit is projected to decline gradually as policy priorities have shifted towards capital expenditure. “Pressures for fiscal consolidation will likely increase from higher public debt and rising borrowing costs. Amid elevated social needs, a still fragile recovery and lagging employment, it is imperative to avoid premature consolidation, however. The weak debt situation emphasizes the need for revenue mobilization,” the report said.
The UNDESA expects inflation to decelerate throughout 2022, continuing a trend observed since the second half of 2021 when relatively restrained food prices compensated for higher oil prices. “A sudden and renewed rise in food inflation, however, due to unpredictable weather, broader supply disruptions and higher agricultural prices, could undermine food security, reduce real incomes and increase hunger across the (South Asia) region,” it added.