The global economy finds itself once again in a highly uncertain moment, as the
accumulated impacts of recent adverse shocks, such as the COVID-19 pandemic and Russias
invasion of Ukraine, continue to surface in unexpected ways. The repercussions of these
events, coupled with factors like pent-up demand, supply disruptions, and commodity price
spikes, have pushed inflation to multidecade highs in numerous economies. As a response,
central banks have taken aggressive measures to tighten their monetary policies and steer
inflation back toward their targets, aiming to keep inflation expectations stable.
Despite central banks communication of their intentions, the rapid increase in
interest rates and the anticipated slowdown in economic activity to curb inflation have
led to concerns in the financial system. Combined with regulatory gaps and the realization
of bank-specific risks, these developments have raised worries about financial stability.
While many banks have demonstrated resilience with their robust liquidity and capital
positions, others with business models heavily reliant on the persistently low nominal
interest rates of previous years have faced acute stress. Some of these financial
institutions have either been unprepared or unable to adapt to the swift pace of interest
rate rises.
The repercussions of these challenges became evident in mid-March 2023 when two
specialized regional banks in the United States unexpectedly failed, sending shockwaves
through financial markets. Additionally, a loss of confidence in Credit Suisse, a globally
significant bank, further intensified market turbulence. Consequently, bank depositors and
investors began to reassess the safety of their holdings, leading to a shift away from
institutions and investments perceived as vulnerable. The situation resulted in a brokered
takeover of Credit Suisse. As a consequence of these events, broad equity indices across
major markets have fallen below their pre-turmoil levels, while bank equities have faced
extreme pressure.
In light of these developments, financial authorities and policymakers are closely
monitoring the situation and taking appropriate measures to address the stresses in the
financial system and ensure stability. However, the interconnected nature of the global
economy and financial markets means that vigilance and proactive measures will be
essential to navigate the uncertainties and challenges that lie ahead.
Source: world Economy outlook
CHALLENGES FOR GLOBAL ECOMONY
The economic survey highlights six major challenges faced by the global economy:
COVID-19 Related Disruptions: The ongoing COVID-19 pandemic caused significant
disruptions in economies worldwide, leading to supply chain disruptions, business
closures, and unemployment.
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Russian-Ukraine Conflict: The conflict between Russia and Ukraine had adverse
impacts on the global economy, particularly in terms of geopolitical tensions and
disruptions in critical supply chains, such as food, fuel, and fertilizer.
Central Banks Response to Inflation: Central banks, led by the Federal Reserve,
responded to rising inflation by implementing synchronised policy rate hikes. This
tightening of monetary policy aimed to curb inflation but also led to the appreciation of
the US Dollar and widened Current Account Deficits (CAD) in net importing economies.
Global Stagflation Prospects: There were concerns about the global economy facing
stagflation, a situation of stagnant economic growth coupled with high inflation, which
could hinder overall growth.
Cross-Border Trade Slowdown: Nations felt compelled to protect their economic
space, leading to slower cross-border trade, which negatively affected overall economic
growth.
Chinas Slowdown: China experienced a considerable economic slowdown driven by its
policies, contributing to challenges in the global economy.
Furthermore, India faced these challenges but managed to withstand them better than
most economies. The world economy experienced multiple disruptions in the last eleven
months, similar in magnitude to those caused by the pandemic over two years. The conflict
and rising commodity prices, such as crude oil, natural gas, fertilizers, and wheat,
strengthened inflationary pressures. This inflation surge was supported by fiscal stimuli
and accommodative monetary policies initiated to address the output contraction in 2020.
As inflation and monetary tightening increased, bond yields across economies hardened,
leading to an outflow of equity capital from various economies into the safe-haven market
of the United States. This capital flight resulted in the US Dollars appreciation against
other currencies, leading to widening CAD and increasing inflationary pressures in net
importing economies.
INDIAN ECOMONY
According to ecomonic Survey, Indias recovery from the pandemic has been relatively
quick, and the outlook for 2023-24 appears promising, supported by robust domestic demand
and an upturn in capital investment. Encouragingly, there are early indications of a new
private sector capital formation cycle, complemented by the governments substantial
increase in capital expenditure, offsetting the private sectors cautious approach to
capital expenditure.
Over the past seven years, budgeted capital expenditure has risen significantly,
surging by 2.7 times from FY16 to FY23, reinvigorating the Capex cycle. The introduction
of structural reforms like the Goods and Services Tax and the Insolvency and Bankruptcy
Code has enhanced the economys efficiency and transparency, promoting financial
discipline and better compliance.
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However, on the global front, the IMFs World Economic Outlook, October 2022, forecasts
a slowdown in global growth from 3.2 per cent in 2022 to 2.7 per cent in 2023. This
deceleration in economic output, along with increased uncertainty, is expected to dampen
trade growth, with the World Trade Organisation projecting a decline in global trade from
3.5 per cent in 2022 to 1.0 per cent in 2023.
Regarding Indias external balance, there are risks stemming from various sources.
Although commodity prices have retreated somewhat from their record highs, they remain
above pre-conflict levels. Indias strong domestic demand, coupled with elevated commodity
prices, is likely to contribute to unfavorable developments in the current account
balance. Additionally, slackening global demand may result in plateauing export growth. If
the current account deficit widens further, there might be pressure on the Indian currency
to depreciate.
Persistently high inflation could lead to a prolonged tightening cycle, keeping
borrowing costs elevated for an extended period. This could result in low growth for the
global economy in FY24. However, there are two potential silver linings amidst subdued
global growth: oil prices are expected to remain low, and Indias Current Account Deficit
(CAD) is projected to be better than previously anticipated. Overall, the external
situation is expected to remain manageable.
In conclusion, while Indias economic recovery looks promising, external factors and
global uncertainties may pose challenges. Continued vigilance and prudent policy measures
will be necessary to navigate the evolving economic landscape effectively.
Source- Econmic Survey 2023
INDIA INCLUSIVE GROWTH
The Survey highlights the importance of inclusive growth, particularly when it comes to
job creation. It points out that both official and unofficial sources confirm a rise in
employment levels in the current financial year. According to the Periodic Labour Force
Survey (PLFS), the urban unemployment rate for individuals aged 15 years and above
declined from 9.8 per cent in the quarter ending September 2021 to 7.2 per cent in the
same quarter one year later (September 2022). This improvement in the labour force
participation rate (LFPR) further confirms the economys emergence from the
pandemic-induced slowdown early in FY23.
In FY21, the government introduced the Emergency Credit Line Guarantee Scheme (ECLGS),
which successfully protected micro, small, and medium enterprises (MSMEs) from financial
distress. A recent CIBIL report (ECLGS Insights, August 2022) reveals that the scheme has
been beneficial for MSMEs facing the COVID shock, with 83 per cent of ECLGS borrowers
being micro-enterprises. More than half of these micro units had an exposure of less than
Rs10 lakh. Interestingly, the CIBIL data also shows that ECLGS borrowers had lower
non-performing asset rates than eligible enterprises that did not avail of the scheme.
Moreover, the GST paid by MSMEs has been rising since declining in FY21 and has now
surpassed the pre-pandemic level of FY20, demonstrating the financial resilience of small
businesses and the effectiveness of targeted government intervention towards MSMEs.
Furthermore, the governments implementation of the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA) has been successful in rapidly creating more
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assets related to "Works on individuals land" than in any other category.
Additionally, schemes like PM-KISAN, benefiting households covering half the rural
population, and PM Garib Kalyan Anna Yojana, have significantly contributed to reducing
poverty in the country.
According to the UNDP Report of July 2022, the recent inflationary episode in India is
expected to have a low impact on poverty due to well-targeted support measures. Moreover,
the National Family Health Survey (NFHS) in India indicates improved rural welfare
indicators from FY16 to FY20, covering areas such as gender, fertility rate, household
amenities, and women empowerment.
India has demonstrated its economic resilience by effectively mitigating external
imbalances caused by the Russian-Ukraine conflict without losing growth momentum. Despite
withdrawals by foreign portfolio investors, Indias stock markets had a positive return in
CY22. Furthermore, Indias inflation rate remained within its tolerance range compared to
several advanced nations and regions.
As the third-largest economy in the world in PPP terms and the fifth-largest in market
exchange rates, India has almost "recouped," "renewed," and
"re-energized" what was lost, paused, or slowed during the pandemic and the
European conflict. This reflects the strength and adaptability of the Indian economy in
facing and recovering from challenging circumstances.
Source- Econmic Survey 2023
Fiscal policy amid rising interest rates and a cost-of living squeeze:
Fiscal policies should depend on exposure to the war, the state of the pandemic, and
the strength of the recovery. Following a huge and necessary fiscal expansion in many
countries during the pandemic, debt levels are at all-time highs and governments are more
exposed than ever to higher interest rates. The need for consolidation should not prevent
governments from prioritizing spending with well-targeted support for the
vulnerable?including refugees, those struggling because of commodity price spikes, and
those affected by the pandemic. Where fiscal space permits and when monetary policy is
constrained at the national level?for instance by the Effective Lower Bound or in a
monetary union?broader fiscal support may be warranted, depending on the severity of the
decline in aggregate demand. But this support should be deployed in ways that avoid
exacerbating ongoing supply-demand imbalances and price pressures. Where fiscal space is
more limited, governments will need to tread a difficult path between fiscal consolidation
and prioritizing essential expenditures.
Preparing for tomorrows economy:
Beyond the immediate challenges of the war and the pandemic, policymakers should not
lose sight of longer-term goals. Pandemic disruptions have highlighted the productivity of
novel ways of working. Governments should look to harness positive structural change
wherever possible, embracing the digital transformation and retooling and reskilling
workers to meet its challenges. Carbon pricing and fossil fuel subsidy reform can also
help with the transition to a cleaner mode of production, less exposed to fossil fuel
prices?more important than ever in light of the fallout of the war on the global energy
market. The green energy transition will also entail labor market reallocation across
occupations and sectors.
(Source- World Economic Outlook, April 2022)
INDIAN ECONOMY OUTLOOK
Two years into the COVID-19 pandemic, the global economy continues to be plagued by
uncertainty, with resurgent waves of mutant variants, supply-chain disruptions, and a
return of inflation in both advanced and emerging economies. Moreover, the likely
withdrawal of liquidity by major central banks over the next year may also make global
capital flows more volatile. In this context, it is important to evaluate both the pace of
growth revival in India as well as the strength of macro-economic stability indicators. It
is also essential to look at progress in vaccination as this is not just a health response
but also a buffer against economic disruptions caused by repeated waves of the pandemic.
The Indian economy, as seen in quarterly estimates of GDP, has been staging a sustained
recovery since the second half of 2020-21. Although the second wave of the pandemic in
April June 2021 was more severe from a health perspective, the economic impact was muted
compared to the national lockdown of the previous year. Advance estimates suggest that GDP
will record an expansion of 9.2 per cent in 2021-22.
Revised Indian Economy Growth for Q1 2023 Surpasses Expectations
The Indian economy showcased robust growth in the first quarter of 2023, expanding by
6.1% year-on-year. This growth rate surpassed market forecasts of 5% and was significantly
higher than the upwardly revised 4.5% growth recorded in Q4 2022. Several factors
contributed to this notable performance.
Private consumption, services exports, and manufacturing were the primary drivers of
the economic expansion. Notably, the services sector played a significant role, accounting
for more than half of the countrys GDP.
Private spending exhibited a faster rise, growing at 2.8% compared to 2.2% in the
previous quarter. Public expenditure also rebounded, recording a growth rate of 2.3% after
facing a decline of -0.6% in the previous quarter. Gross Fixed Capital Formation (GFCF)
showed robust growth, rising by 8.9% compared to 8% in the last quarter. Additionally,
stocks recovered with a growth rate of 5.9% after experiencing a slight contraction of
-0.1%. The exports sector performed exceptionally well, increasing by 11.9%, outpacing the
growth in imports, which stood at 4.9% as opposed to 10.7% in the previous quarter.
On the production side, the manufacturing sector exhibited positive growth for the
first time in three quarters, expanding by 4.5% compared to a decline of -1.4% in the
previous quarter. Furthermore, other key sectors showed faster growth, including
agriculture, which saw a growth rate of 5.5% as opposed to 4.7%, construction with a
growth rate of 10.4% compared to 8.3%, financial and real estate sector with a growth rate
of 7.1% compared to 5.7%, and public administration with a growth rate of 3.1% compared to
2% in the last quarter.
Based on the strong performance observed in the first quarter, the GDP growth forecast
for the 2022-23 fiscal year has been revised upward to 7.2% from the previous estimate of
7%. This indicates a positive outlook for the Indian economy in the coming months.
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