Economic Outlook for India
As India continues to emerge from the impact of the COVID-19 third wave, economic mobilization is seen across sectors. But as the country moves towards broader growth recovery, it is now facing issues such as rising inflation, surging oil prices, interest rate scenarios, and add to all these, the Russia-Ukraine standoff.
So, a few questions that rises here are – Is India’s nascent economic rebound at risk? To what extent will the external geopolitical and economic shocks impact India?
In this blog, we’ll try to find answers to these questions and discuss the economic outlook for India in the immediate future.
The impact of the Russia-Ukraine standoff on the Indian economy
The impact of these developments could be very severe in European countries like Germany, France, Italy, etc. However, in India, its impact could be negligible since the European Union (EU) is the single largest market for us. But if there is a supply shock in the EU, the imports to India, including steel, engineering wood, etc., could reduce. This, in turn, would increase the consumption of Made in India goods. So, ironically, this could ultimately have a positive impact on the Indian economy.
India’s exports, which grew by 41.6% in the calendar year 2021, could also get a boost. Given that the European industries could temporarily get crippled by war-like developments, the demand for Indian exports could rise exponentially.
However, if there are sanctions on Russia’s oil and gas exports, it could disrupt the supply chain in the entire world. Russia accounts for around 11% of the world’s crude oil export and is the world’s largest exporter of natural gas. So, the prices of these commodities can rise for a short period. But the Government’s revenues are expected to remain unaffected due to this.
The rising inflation
Inflation can never be transitory. If we look at the US, the M2 growth was over 20% every month from March 2020 to April 2021. In the last 22 months, the US had witnessed exceptional monetary growth, which has also resulted in a rise in inflation.
Now, if we compare the US’s situation with India, the concept of M3 in our country is the same as that of M2 in the US. The M3 growth in India over the last 30 years has averaged over 19%. However, during the pandemic period, there was not a single month when the M3 growth rate touched 19%. It means that we’ve witnessed deflation instead of inflation during that period. So, a moderate rise in inflation is nothing that we should be worried about.
Expectations from the FOMC meeting in March 2022
The Fed usually raises rates at every meeting. So, we can expect that they will raise the rates by 25 basis points this time as well. We can also expect at least three more rate hikes during the course of this year. And it’s quite reasonable given the prevailing high inflation rate.
However, if there is unrest in the European countries due to the ongoing Russia-Ukraine standoff, we could see a change in the scenario. There could be a lot of volatility in the market in the next three to four months.
FII investments can increase
Foreign Institutional Investors (FIIs) put a lot of valuation on India’s market. With good corporate earnings in the past few months, the valuations of Indian companies have started to look a lot better now. India’s economy is hence, expected to do well in the future and so, we can see some inflows from the FIIs in the next three to four months.
India’s foreign reserves have also boomed during the pandemic years. So, there are a lot of sectors that have gained strength, and this will provide a buffer to the economy. Another reason why India can attract more capital inflow in the upcoming years from the FIIs.
Strong projections for the GDP
We can expect India’s real GDP growth of 9.6% for this year and 8.4% for the next year. During the second wave of the pandemic, the real GDP growth was around 10% which could have crossed 30% had the pandemic not impacted the economy. This year, we aren’t expecting a similar disruption. So, the first quarter of January to March could witness very strong growth.
The fiscal deficit could also reduce to 4.9 for the next financial year and as a consequence, bank lending could pick up and we can start getting strong private investments. An investment-led growth could prove to be favorable for India’s GDP growth.
It’s quite interesting that India is the second-largest producer of steel, aluminum, and cement. It is the fifth-biggest producer of cars and the fifth-largest oil refiner in the world. So, India has a lot of industries to swell its GDP. We just need to tackle two extreme issues - labor-intensive manufacturing and the production of electronics for global export.
Every factor is projecting India’s economic boom in the future. We just need to focus on a few concerns and fight for the electronic export space with our neighboring countries including China, Taiwan, Japan, etc. Having said that, we have an enormous capability to attract investment in steel and cement manufacturing. We can double our steel manufacturing capacity in the next two to three years.
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