Editorial: Gloomy economy

Contrary to NDA govt’s glib pronouncement that India will witness a high growth trajectory, gloomy clouds hover over the country

Gloomy clouds continue to hover over India’s economic landscape. Contrary to the NDA government’s glib pronouncement that the country would witness a high growth trajectory in the world, international agencies have downgraded India’s economic growth forecast. While the World Bank scaled down the forecast to 6.5% for the current fiscal from its earlier estimate of 7.5%, announced in June, the United Nations Conference on Trade and Development (UNCTAD) has said the GDP growth is expected to decelerate to 5.7% in 2022 from 8.2% last year due to higher financing costs and weaker public expenditures. Last week, the Reserve Bank of India too cut its growth forecast to 7% from an earlier estimate of 7.2% after increasing the repo rate by 50 basis points to 5.9% to fight inflation. Another area of concern is that the services sector activity fell to a six-month low in September due to a cooling in demand amid soaring prices. High inflation and low demand pulled India’s factory growth to a three-month low in September. The seasonally adjusted S&P Global India Services Purchasing Managers’ Index (PMI) fell to 54.3 in September, the weakest rate of expansion since March, from 57.2 in August. The PMI data, released every month, is an indicator of the overall health of the economy. Private sector sales rose at the weakest pace in six months, amid softer increases in manufacturing and services economies. Hiring in the sector continued for the fourth month but fewer jobs were created compared with August.

The PMI survey pointed out that price pressures, an increasingly competitive environment and unfavourable public policies restricted the upturn in the month. This is the third time that the World Bank has revised its growth forecast for India in the current financial year. In April, it revised India’s projected economic growth to 8% from the previous estimate of 8.7% in January. One of the reasons cited by the World Bank for trimming India’s growth forecast is the uneven recovery from the impact of the coronavirus pandemic in South Asia. The steep depreciation of the rupee seen due to interest rate hikes in the US presented additional challenges to the Indian economy. Last month, the US Federal Reserve raised its interest rate by 75 basis points and hinted at more hikes in the future. This led to the strengthening of the US dollar and the weakening of other currencies, including the Indian rupee. Currency instability poses renewed inflation worries as imported items become more costly. This means that the RBI will continue hiking interest rates to protect the rupee and contain price pressures. The spillover from the Russia-Ukraine war and the global monetary policy tightening cycle also weigh on India’s economic outlook. Rising borrowing costs will affect domestic demand while slowing global growth inhibits India’s export growth.

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