The successful macroeconomic management of the Covid-19 pandemic has resulted in a strong recovery of India’s economy because of which the country is in a better position to face the economic fallout of the current Ukrainian crisis, a top official from the International Monetary Fund has said.
Observing that India represents about seven per cent of the total world economy in purchasing power parity (PPP) terms and is one of the countries that are growing rapidly, IMF’s Mission Chief for India Nada Choueiri said that India's growth is lifting the global economy and is very important for a well-functioning global economy.
Vaccine producer
"So, here you have an important contribution. The other important role that India is playing today is in the provision of vaccines,” she said on Wednesday.
As a significant vaccine producer, India has a role also in managing future pandemics, she said.
“The macroeconomic management of the pandemic has resulted in a strong recovery although the recovery remains incomplete. So, India is in a much better place today to face the crisis from the Ukraine shock than it was at the time of the taper tantrum. But the global economy is in a very difficult place today because of the shocks,” Ms. Choueiri said.
Giving her impression about the performance of the Indian economy during this global economic crisis beginning with the Covid-19 pandemic, she said India took important measures on a spectrum of policies.
“We saw sound fiscal management to get things right, to create fiscal space, to respond to the immediate needs of the population. We also saw proactive monetary policy to respond to the needs of the financial system and of the corporate sector to support the liquidity needs during the pandemic,” she said.
In its latest World Economic Outlook, the IMF downgraded its projections from its previous of nine per cent growth for the year 2022 to 8.2 per cent (a drop of 0.8 percentage points) this year.
Ukraine crisis
Ms. Choueiri explained that this was largely due to the war in Ukraine.
“About 0.6 percentage points of that is because of the war in Ukraine and the impact on India's economy. There are several channels that we can consider. The first and the most immediate channel is of course oil and other commodity prices. We have seen these have shot up and we expect them to remain high for a long period of time,” she said, observing that this has an impact on real incomes and hence on domestic demand, which will bring down growth.
The IMF official said the other channel is of external demand which is a global economic slowdown because of the war in Ukraine, particularly in Europe, an important trading partner for India.
“We expect this to reflect lower external demand for India's exports. So, exports will grow at a slower pace than we had been expecting in January,” she said, explaining the reasons for the 0.6 percentage drop in India’s GDP growth projections this year because of the war in Ukraine.
Another 0.2 percentage point drop is the base effects, she said.
“Because we have updated our database. Compared to January, we have releases of the Q4 data and some historical data that were updated. So, these are base effects that translate into 0.2 percentage lower growth. So, from nine, we went to 8.8 because of these base effects. And then we went to 8.2, so 0.6 percentage points lower because of Ukraine,” she noted.
Ms. Choueiri said India is on a recovery path from the economic fallout of the pandemic. There was a very sharp recession in fiscal year 2021, where GDP declined by 6.6 per cent. And there was a strong recovery from that last year. The estimate for growth for last year is 8.9 per cent.
“This is a strong rebound. And this is despite a very severe second wave, which happened in the first quarter of the financial year that just ended. So, despite that we see a strong recovery having taken place last year and the recovery is still continuing,” she said.
India’s growth will slow down to 6.9 per cent next year, as per the latest projections, and will stay around seven per cent for the next few years.
Responding to a question on the challenges being faced by the Indian economy, Choueiri listed the Ukrainian war at the top of the list.
“The risks are that this war becomes even more protracted and the solution further away. And so, economic dislocation and disruptions to supply chains and to commodity markets becoming even more severe than what we are expecting. So, this is a big risk that we worry about." Another risk that we worry about of course is still the pandemic. We are not over from the pandemic,” she said.
Caution on COVID-19
India is today among the most vaccinated countries in the world. But the risk of new variants that can resist the vaccines are still there. And this is something that we need to be watchful for, she said.
“The third biggest risk is a shift in global financial conditions, the IMF India chief said. Today inflation is a big worry in a lot of advanced economies in Europe, in the US and there is a sense that maybe monetary policy will need to tighten faster than anticipated by markets.
“So, if there is a significant shift in monetary policy beyond what the market expects to try to tame these inflationary pressures, this could cause an abrupt shift in global financial conditions, which could have a negative impact on India,” she said.
Ms. Choueiri said compared to other countries, during the pandemic India was able to use judiciously the policy space that it had.
“We saw that the authorities mounted a strong fiscal, monetary and financial sector response to provide liquidity support to MSMEs and corporates, to provide support to help protect the poor households through in kind and cash transfers; to support rural employment schemes,” she said.
According to Ms. Choueiri, the fiscal management got a number of things right in particular, for example, increasing the fuel excise at the beginning of the pandemic when prices dropped significantly to create fiscal space.
“This additional fiscal space created has helped India provide the support that it did during the pandemic,” she said.
“So, we think that in terms of macro-management of the economic crisis India faired pretty good and was able to use the policy space that it had to provide support,” she said, adding that it was a similar performance on the monetary policy space as well.
Foreign reserves
Observing that in terms of the Ukraine war a whole slew sets of challenges are coming on top of the pandemic crisis, Ms. Choueiri asserted that a number of strengths will help India whether this shock.
“First on the external sector, we see that the central bank has significant amount of foreign exchange reserves that would help against, weathering adverse global financial condition shocks,” she said.
On the level of food supply, which is threatening the global economy, especially emerging markets and the developing economies, India has a strong production of staples that will help insulate it from this food crisis, she asserted.
“So, the Ukraine shock is still unraveling. And we have to see what specifically the policies are going to be to address this, but so far, we see that (India has) the right instruments in place to manage this crisis,” she said.
The IMF India chief said that given the shock to oil and food price, on the fiscal side, India could consider having additional support to those that are directly impacted by this in the form of additional direct in-kind transfers or, cash transfers to the most vulnerable population.
Ms. Choueiri said there was a need for monetary policy to be watchful of second round effects and to communicate how they see the second-round effects and what would be the actions taken to try to stem them and prevent a sustained high inflation in India.
