The outlook for India’s exports may be dented by the global slowdown driven by the confluence of stubbornly high inflation, rising borrowing costs and geopolitical tensions, but ‘resilient’ domestic demand and a ‘re-invigorated’ investment cycle will push the economy’s growth and spark a rebound in jobs in coming months, the Finance Ministry said on Thursday.
Arguing that recent inflation pressures have been driven more by local factors, including higher food prices, than imported reasons, the Ministry asserted those pressures are also set to dampen, thanks to easing international commodity prices and the arrival of the Kharif crop. India’s retail inflation has been over 7% in all but two months since April 2022, and stood at 6.8% in October.
The Finance Ministry’s monthly review of the economy for October also emphasised that demand under the rural employment guarantee scheme (MGNREGS) has fallen to its lowest level this year last month, adding that the sharp rise in tractor sales in September and October reflects ‘improved sentiments and an expected increase in crop area sown’.
“A rapid deterioration in global growth prospects, high inflation, and worsening financial conditions have increased fears of an impending global recession,” the review noted, adding that the ‘spillovers’ of this slowdown ‘may dampen India’s exports businesses outlook’.
Slowdown in China
India’s goods exports contracted for the first time since February 2021 in October, and the Ministry said that the slowdown in China has also affected global trade, ‘exacerbating the effects of high inflation and borrowing costs’. “China’s exports contracted in October 2022, the first time since May 2020, as local curbs and lower global demand impacted the country’s trade,” it pointed out.
“… However, resilient domestic demand, a re-invigorated investment cycle along with strengthened financial system and structural reforms will provide impetus to economic growth going forward,” the Ministry said about India’s growth prospects.
“Hiring by firms is likely to witness an improvement in upcoming quarters driven by a rebound in new business gains as firms continue to benefit from the lifting of the COVID-19 restrictions and the possible sustaining of the sales momentum witnessed during the festival season,” the review projected.
“Demand for work under the MGNREGS has been declining since May 2022 and was at its lowest in October since the beginning of the current financial year, signalling a decline in the unemployment rate in rural areas and a rise in employment in agricultural and non-agricultural activities stemming from the normalisation of the rural economy and stabilisation in the rural job market,” the Ministry highlighted.
The recent financial upheavals in crypto exchanges and connected intermediaries, the review noted, is ‘a reminder of unknown unknowns’ even as the global economy continues to navigate turbulence, with persisting macroeconomic uncertainty.
Rising stagflation risks
“Despite significant increases in policy rates and quantitative tightening measures adopted by central banks worldwide, inflationary pressures remain stubbornly high. These factors have, in turn, caused multiple downward revisions to global output, with the level of economic activity gradually declining and stagflation risks rising,” it pointed out.
While higher interest rates may tip economies into recessions if central banks stay their course, higher borrowing costs may expose fault lines in their financial systems which will further accentuate global macroeconomic stress, the Ministry cautioned.
The impact of increased borrowing costs and stubbornly high inflation is beginning to show in multiple leading indicators of global economic activity, it acknowledged.
Editorial | Trade tumult: On shrinking exports
Rising interest rates have also caused sovereign bond yields in advanced economies to spike this year, while yields in emerging market economies have mainly remained stable over this period.
“In India’s case, this has translated to a lower risk premium, with the spread between the U.S. 10-year yield and India’s 10-year yield falling from 478 basis points (bps) to 331 bps between January and October 2022,” the Ministry pointed out. One basis point equals 0.01%.