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India Amidst World’s Economic Whirlwind

On two occasions in early June, finance minister Nirmala Sitharaman assured the country about the economy’s growth outlook and fundamentals. On June 6, in a meeting of BRICS finance ministers and central bank governors, she said India’s growth will continue to be supported by “fiscal spending along with an investment push.” Two days later, on June 8, while speaking at a finance ministry event, she referred to “sound” macroeconomic fundamentals, attributing them to reforms by NDA government since 2014. “Major steps by government before the Covid-19 pandemic hit us, which include reducing corporate tax rate, ensuring that economy is greatly digitised, bringing in GST (goods and services tax) and IBC (Insolvency and Bankruptcy Code), all this heavy-lifting prepared us for the unprecedented situation of the pandemic,” she said.

The statements came in the backdrop of a wilting global economy due to skyrocketing inflation, rising interest rates, supply-chain disruptions and soaring prices of energy due to Russia-Ukraine war — a concoction of every possible macroeconomic malaise, which triggered murmurs that a global recession is inevitable. A 1.4% GDP contraction in first quarter (January-March) in US, followed by 0.9% contraction in second quarter, a sharp reversal from annual growth rate of 6.9% in fourth quarter of CY21, aggravated these fears. With high inflation and interest rates becoming a norm globally, all major economies are facing the heat. Germany registered 0.2% sequential growth in Q1 of 2022. Economic growth in Organization for Economic Co-operation and Development (OECD) region dipped to 0.1% in Q1 of 2022, compared with 1.2% in Q4 of 2021. Economy of G7 nations contracted 0.1% in Q1. It had grown 1.2% in Q4 of 2021. Italy grew by 0.1%, Japan registered a contraction of 0.5%, while France witnessed zero growth in Q1, 2022. Warning of stagflation risks, World Bank has cut global CY22 GDP growth forecast to 2.9%, from 5.7% in CY21. In January, it had projected 4.1% growth, and in April revised that to 3.2%. OECD has pared 2022 global GDP growth projection from 4.5% to 3%. IMF, too, has cut the global GDP forecast for 2022 to 3.2% from 3.6%.

India: Are Recession, Stagflation Imminent? The Indian economy surpassed pre-Covid levels in FY22 by growing 8.7%. According to ministry of statistics and programme implementation, the size of the Indian economy at constant prices was ₹147.36 lakh crore in FY22, from ₹135.59 lakh crore in FY21. But that’s deceptive. Growth is just 1.1% over FY20 GDP of ₹145.69 lakh crore. Remember FY20 was also a slowdown year when GDP growth had almost halved to 3.7% from 6.8% in FY19. India will also face ripple effects of any global slowdown, but economists rule out recession or stagflation even though they say that there is probability of a general slowdown. “For now, it does not seem that India is facing the risk of recession or stagflation just because US or other developed markets are going to face it,” says Suvodeep Rakshit, senior economist at Kotak Institutional Equities. A sector-specific slowdown is more likely, he says. “Recession in India this fiscal is certainly a low probability event,” says Crisil principal economist Dipti Deshpande. “Global events will naturally impact India through weaker export demand, but Indian economy continues to be predominantly domestic-driven. This fiscal, we expect support to growth from two areas — revival in contact-based services sector, which will provide a one-time lift as fear of Covid-19 subsides, and continued thrust on government capex,” says Deshpande. “Downsides to Crisil's FY23 GDP growth projection of 7.3%, from 7.8% earlier, remain on account of slower global growth, higher input costs that manufacturers face and some weakness in demand as inflation remains high,” says Deshpande.



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