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Focus Story

        India to Remain                                         ADVANCED                                                       growth cycles have been       MOST RECENTLY, IN           Imported inflation is another   post-pandemic recovery


                                                                                                                                                                                                                    and higher credit growth.
                                                                                                                               remarkably synchronised with
                                                                                                                                                                                         fallout of rupee depreciation.
                                                                                                                                                             NOVEMBER, THE US
                                                                ECONOMIES
                                                                                                                                                                                                                    For non-banks, too,
                                                                                                                                                                                         Elevated commodity prices
                                                                                                                               those of advanced economies
                                                                                                                                                             FED HIKED THE
                                                                EXPECTED TO
                                                                                                                                                                                         and a depreciating currency
                                                                                                                               since the 2000s. Put another
                                                                                                                                                                                                                    GNPA is expected to
        Growth                                                  WITNESS SHARP                                                  way, there is no escaping the   POLICY RATE BY 75         act like a double-edged sword   improve 50 bps to 3 per
                                                                                                                                                                                         and remain a challenge at a
                                                                                                                                                             BPS FOR THE FOURTH
                                                                                                                               short-term demand
                                                                                                                                                                                                                    cent. This bodes well for
                                                                GROWTH
                                                                                                                               fluctuations around the trend.
                                                                                                                                                                                                                    the financial sector’s
                                                                                                                                                                                         time when the central bank is
                                                                                                                                                             STRAIGHT TIME
                                                                SLOWDOWN
                                                                                                                               This reflects India’s greater
                                                                                                                                                                                         trying to bring inflation back
                                                                                                                                                                                                                    ability to support
                                                                NEXT YEAR
        Outperformer                                                                                                           inter-linkage with the world,   Systemically important    to its target range.       economic growth.
                                                                                                                               both via trade and financial
                                                                                                                                                                                                                    The government’s tax
                                                                                                                               channels. For instance, India’s
                                                                                                                                                            advanced-economy central
                                                                                                                                                                                         While there has been some
                                                                                                                                                                                         softening in international
                                                                                                                                                                                                                    collections remain
                                                                                                                               export-to-GDP ratio almost
                                                                                                                                                            banks, led by the US Fed, are
        Despite Global                                                                                                         doubled from 11.4 per cent in   hiking interest rates to slow   commodity prices recently, it   healthy and provide
                                                                                                                                                                                         is not in line with slowing
                                                                                                                                                            down the demand impulse in
                                                                                                                               fiscal 2000 to 21.4 per cent in
                                                                                                                                                                                                                    legroom for capital
                                                                                                                                                                                                                    expenditure despite
                                                                                                                                                                                         global growth prospects
                                                                                                                                                            their economies to tame
                                                                                                                               fiscal 2022. The share of
                                                                                                                                                            inflation. Most recently, in
                                                                                                                                                                                                                    higher outgo on subsidies
                                                                                                                               foreign portfolio investment
                                                                                                                                                                                         thanks to geopolitical issues.
                                                                                                                                                                                         For instance, after the OPEC+
                                                                                                                               (FPI) flows in GDP grew
                                                                                                                                                                                                                    and revenue loss due to
                                                                                                                                                            November, the US Fed hiked
        Headwinds                                                                                                              almost sixfold, from 2.2 per   the policy rate by 75 bps for   decided to reduce oil supply,   tax and import duty cuts
                                                                                                                                                            the fourth straight time, to
                                                                                                                                                                                         crude oil prices started
                                                                                                                               cent to 12.3 per cent. Greater
                                                                                                                                                                                                                    on fuels and select
                                                                                                                                                                                                                    imported items. For
                                                                                                                                                                                         moving northward again. To be
                                                                                                                                                            3.75-4.00 per cent.  A higher
                                                                                                                               inter-linkages imply any
                                                                                                                               change in demand and policies
                                                                                                                                                                                                                    government has already
                                                                                                                                                            demand for safe-haven assets
                                                                                                                               in advanced countries would   interest rate, buttressed with   sure, though international   instance, the central
                                                                                                                                                                                         commodity prices are
                                                                                                                               spill over to India and other   amidst the ongoing        expected to fall next year, they   received 52 per cent —
                                                                                                                               emerging countries.          geopolitical turmoil, has led to   would remain above the   or Rs 10 lakh crore — of
                                                                                                                                                            massive appreciation of the   pre-pandemic 5-year average.   this fiscal’s budgeted net
        A    multitude of headwinds   economies and some      decelerate more than that in   high prices and rationing of      The domestic economy has     US dollar. The US dollar index,                         tax revenue of Rs 19.3
                                   emerging market economies.
             continue to make global
                                                              emerging market economies.
                                                                                          energy, and the European
                                                                                                                                                            which measures the strength
                                                                                                                                                                                                                    lakh crore in the first half.
                                                                                                                               already started feeling the
        growth prospects gloomier.                            Many of the latter are      Central Bank would follow            brunt of global headwinds,   of the US dollar, rose 10.8 per   GLOBAL LINKAGES       Most of this is on
                                                                                                                                                                                           OF THE INDIAN
        These include rising interest   S&P Global recently lowered   benefiting from higher   the US Fed because of the       both in the real and financial   cent between January and   ECONOMY IS LIKELY        account of higher inflows
        rates, geopolitical tensions,   its 2022 global growth   commodity prices and have   depreciation of the euro          economies. India’s core      October, indicating            TO CAST A SHADOW         through the Goods and
        which are keeping          forecast by 20 basis points   seen a lower surge in inflation,   versus the US dollar, fuelling   (non-oil, non-gold) exports   depreciation of currencies   ON ITS GROWTH       Services Tax, income tax
        international commodity    (bps) to 3.1 per cent and   thereby requiring a less   imported inflation. The              contracted an average 7.8 per   against the greenback. Rupee,   PROSPECTS            and corporate tax.
        prices elevated, broader   2023 forecast by a greater   stringent monetary policy   Eurozone’s gross domestic          cent on-year in the last three   for instance, depreciated from
        European energy insecurity,   110 bps to 2.4 per cent.   response.                product (GDP) would then             months, with the decline in   74.4/US dollar to 82.3/US                              The government’s focus
        and lingering effects of   Global growth faces increased                          contract 1.3 per cent next           October being as high as 16.9   dollar. That said, it has   The Indian economy’s several   on capital spending,
        Covid-19 (particularly in   headwinds next year, evincing   S&P Global projects US and   year.                         per cent. To be sure, advanced   appreciated to ~81/US dollar   structural strengths will help   coupled with its plan to
        China).                    that monetary policy actions   Eurozone economies to grow                                   economies account for ~45    in the last few days. This is   cushion the blow from the   lower the fiscal deficit
                                   work with a lag. To be sure,   a mere 0.2 per cent and 0.3   The slowdown in the global     per cent of India’s          important because exchange   external headwinds. The    only gradually, should
        As advanced-economy central   this year, growth in many   per cent, respectively, next   economy, especially in the    merchandise exports. The US   rate movement (along with   domestic financial sector and   continue to support
        banks raise rates aggressively   parts of the world (barring   year, in the base case. In the   advanced world, poses   and European Union, which   other factors such as growth   corporate balance sheets are   investment and
        to tame inflation, they will find   China) received support from   downside scenario, where   downside risks to India’s   together account for 72 per   outlook and risk perception)   robust. Corporates have been   consumption demand in
        it hard to stave off a sharp   pent-up demand as      high inflation persists and the   growth outlook. Our analysis   cent of advanced economies’   plays an important role in   deleveraging: the median   the economy.
        downturn in economic             Covid-related        US Federal Reserve (Fed) is   of the long-term growth            GDP, are the two largest     driving FPI flows. No wonder,   gearing ratio (a measure of   These factors will help
        activity. In fact, the latest       restrictions were   forced to tighten the                  movements               export destinations, with 18.0   with some appreciation in the   indebtedness) of the CRISIL   soften the blow from
        survey-based indicators               eased after     monetary policy more                      posits that            per cent and 15.4 per cent   rupee lately, FPIs have once   Ratings portfolio is expected   global headwinds to
        (purchasing managers’                 almost two      aggressively (rates hiked to at            despite               share, respectively. With both   again turned net buyers in   to touch a decadal low of less   some extent, but they
        indices), which gauge the              years.         least 5.00-5.25 per cent by                being on              these economies projected to   Indian capital markets — they   than 0.5 this fiscal. Hence,   cannot completely
        momentum of economic                                  mid-2023, and remain higher                                      slow down sharply next year,   net bought US$3.2 billion in   strong balance sheets are   insulate India. The impact
        activity in the                         Growth in     for longer), the US economy                                      India’s exports are likely to   the first half of November —   expected to shield India Inc   will be more pronounced
        manufacturing and                       advanced      could contract 0.3 per cent                 divergent            remain under pressure. On    after being net sellers in   amidst global uncertainties.   next fiscal, when the peak
        services space, have                   economies is   next year. Meanwhile,                      paths,                the other hand, given India’s   September and October,    Banks remain well capitalised,   impact of the global
        turned into the                        expected to    Eurozone, in the downside                 India’s                healthy growth momentum,     withdrawing an average       and CRISIL expects gross   slowdown and rate hikes
        contractionary zone in                                scenario, would see                                              imports continue to be       US$0.4 billion. The bottom   non-performing assets      materialises. That said,
        most advanced                                                                                                          buoyant, which means net     line is that foreign flows are   (GNPA) of the banking sector   India will remain a
                                                                                                                               trade is going to remain a   expected to remain volatile in   to improve 90 bps to 5 per   growth outperformer
                   Mr. Dharmakirti Joshi, Member, CII Economic            Mr. Adhish Verma, Senior Economist, CRISIL
                         Affairs Council & Chief Economist, CRISIL                                                             drag on growth.              the near term.               cent this fiscal, thanks to   this and next year.
        10   ANALYSIS, RESEARCH, THOUGHT LEADERSHIP & ADVOCACY                                                                                                                                               ANALYSIS, RESEARCH, THOUGHT LEADERSHIP & ADVOCACY  11
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             QUARTERLY JOURNAL OF ECONOMICS
             DECEMBER 2022                                                                                                                                                                                                  DECEMBER 2022
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