As the WEO explains, two sets of factors have helped the global economy withstand the latest price shocks in energy and commodities. The first is the rerouting of energy supplies, which has meant higher energy production in other countries. Inventory drawdown in many countries also helped. Further, substitution through other sources such as renewables has helped reduce the impact. The second factor is sustained investment in artificial intelligence (AI) and related areas, which has given a significant boost to global economic activities and trade. However, it is worth noting that these factors have limits. If energy supplies from West Asia are not restored quickly, falling inventories could soon get reflected in prices and availability. Further, the AI boom and the lofty valuations of related companies are already raising concerns. If these companies fail to meet expectations, there could be severe disruption in financial markets.
Besides, as the IMF has highlighted, growth is concentrating in a select few countries. Notably, only 32 economies now account for 95 per cent of global growth. This level of growth was spread among 54 economies as recently as April. The percentage of countries with downgraded growth projections has also increased. Thus, growth is being reallocated across countries, depending on their exposure to AI and their ability to deal with war-related supply shocks. The concentration of growth in a few countries, largely driven by an investment boom in a single sector, could pose significant risks to global growth and macroeconomic stability. It is also important to keep in mind that this is happening against the backdrop of elevated public debt, particularly in advanced economies, which is, in part, pushing up interest rates. Tight global financial conditions, owing to large borrowing requirements of governments in advanced economies and the substantial investment needs of AI companies, could affect capital flows to small and emerging-market economies, impacting their growth prospects. It could also increase risks to financial stability.
What does all this mean for India? It is expected to grow at a healthy pace, which the IMF’s projections and revisions have acknowledged. However, it must be noted that India is significantly exposed to disruption in energy supplies and is not a significant beneficiary of the AI boom. In fact, the AI boom elsewhere is partly affecting capital flows, which is impacting both its stock and currency markets. India raised a substantial sum of foreign currency, mainly through non-resident bank deposits, to bolster its reserves to deal with pressures on the balance of payments. However, as recent central-bank intervention in the foreign-currency derivatives market suggests, it has not fundamentally changed the dynamics. Thus, sustaining growth and maintaining macroeconomic stability will require considerable policy agility.
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