Saturday, Jun 3, 2023

Opinon: Protect the positive trends

By Dr K Srinivasa Rao The global economy is under stress due to geopolitical hostilities and continuing risks of Covid-19 on increased mobility. Rising inflation and repercussions of global portfolio redistribution owing to policy rate hikes in the western world are exacerbating risks to emerging economies. Due to their internal constraints and policy objectives, emerging […]

By Telangana Today

Published Date - 11:45 PM, Fri - 22 April 22

By Dr K Srinivasa Rao

The global economy is under stress due to geopolitical hostilities and continuing risks of Covid-19 on increased mobility. Rising inflation and repercussions of global portfolio redistribution owing to policy rate hikes in the western world are exacerbating risks to emerging economies. Due to their internal constraints and policy objectives, emerging economies are responding to policy normalisation in their own way. India has now shifted its focus to inflation by modifying the policy stance linked to the inflation trajectory.

In the melee of ongoing external sector dynamics, the Asia-Pacific countries could be hit hard by the Russia-Ukraine war, even if they are not directly exposed to the conflict, according to a new Economist Intelligence Unit report. The International Monetary Fund (IMF) has flagged concern about a major new complication, the fragmentation of the global economy into geopolitical blocs with differing trade and technology standards, payment systems and reserve currencies. This could destabilise the synergy of globalisation pursued so far. Sri Lanka, for the first time since 1948 is defaulting on its external debt of $7 billion and seeking the IMF help to deal with the economic crisis.

According to Nomura Holdings, nearly 400 million people across 45 cities in China are under full or partial lockdown as part of the country’s ‘zero-Covid policy’. They represent 40% of China’s GDP put at $7.2 trillion. Analysts are ringing warning bells and indicate that investors aren’t properly assessing how serious the global economic fallout might be from these prolonged isolation orders and their aftermath. Global markets continue to underestimate the impact as much attention remains focused on the Russian-Ukraine conflict and Fed rate hikes. The China-dependent economies could face spillover risks of the resurgence of lockdowns and its perils.

External Sector

India’s exports peaked to $419.65 billion in FY22 with service sector exports reaching a record $250 billion. The Exim Policy 2015-20 now stands extended until this September. The uptrends in exports continue with mid-April exports reaching $19 billion. Due to a spike in import commodities, the current account deficit expanded to 2.7% of the GDP in the Oct-Dec 2021 quarter from 1.3% in July-Sept.
According to S&P Global Ratings, India’s CAD could widen to more than 5% of the GDP in 2022 if the global crude oil price touches $150 per barrel. Due to apprehensions of rate hikes in the US and elsewhere in the world, foreign portfolio investors (FPIs) sold Indian shares worth Rs 1.4 lakh crore during FY22 as against net inflows of Rs 2.7 lakh crore in the previous fiscal.

This is the worst ever exodus of FPIs from the domestic equity market. They withdrew Rs 88 crore in 2018-19, Rs 14,171 crore in 2015-16 and Rs 47,706 crore in 2008-09. Forex reserves dipped to $604 billion on April 8, 2022, as against $642 billion on September 3, 2021. The export sector should continue to maintain the uptrend in the current fiscal honing its capacity.

Domestic Economy

Though the domestic economy, following thoughtful policies, is showing signs of revival, it is definitely at risk. Choked supplies and mounting commodity prices, especially food and energy, have stoked inflationary pressures, exacerbating policy trade-offs for central banks.

CPI inflation surged to 6.95% and WPI inflation to 14.55% in March on the back of higher food inflation and broad-based input cost pressures. In view of higher global energy prices, the monetary policy committee of the Reserve Bank of India (RBI) revised its inflation forecast upwards — from 4.5% to 5.7% — for FY23 and the RBI would henceforth pivot from supporting economic growth to containing inflation.

Effectively, the average inflation projected for 2022-23 was raised by 120 basis points (to 5.7%) and growth lowered by 60 basis points (to 7.2%) relative to the February 2022 configuration, mirroring the impact of the lingering geopolitical conflict. The IMF, in its latest World Economic Outlook report, has slashed the growth forecast for India in FY23 to 8.2% from 9%, taking cognisance of higher commodity prices that will potentially weigh on private consumption and investment.

The good news comes from the farm sector. The India Metrological Department and even private agency Skymet are expecting the monsoon to be normal. During June-September, the country is likely to receive 99% of long-period average rainfall. The forecast comes as a big relief for policymakers struggling with increasing inflation and slowing growth.

In the industrial sphere, the headline manufacturing Purchasing Managers’ Index (PMI) moderated to 54 in March 2022 from 54.9 in February, as companies reported softer expansions in new orders and production. The PMI services improved to 53.6 in the same period from 51.8, recording the strongest rate of expansion since December 2021 and stretching an expansionary run to the eighth consecutive month. The Business Expectations Index (Future Activity Index) also improved marginally vis-à-vis February 2022.

The average monthly gross GST collections for FY22 stood at Rs 1.23 lakh crore, 30.5% higher than the monthly average seen in the previous fiscal. The sharp surge came on the back of anti-evasion measures, “especially action against fake billers”, and a pick-up in economic activity. Toll collections too remained upbeat in March, doubling from pre-pandemic levels for the fourth consecutive month.

Inclusive Approach

The positive trends achieved so far should be protected and nurtured further with inclusive and coordinated efforts of central and State governments. The MSME-centric approach should continue. The government has already extended the Emergency Credit Line Guarantee Scheme till March 2023 or till the scheme limit of Rs 5 lakh crore is used. Bank credit growth reached 9.6% as of March 25, 2022, which should be accelerated. Banks are now on a stronger footing with moderated bad loans and an improved capital adequacy ratio. The benefits of government policies and enablers should reach the target group of entrepreneurs.

Government clearances and permissions should be granted on priority to cope with the ongoing stress. The corporate sector and the government should expedite payments to MSMEs in time and extend full support to every sector to counter the risks. It is the inclusive resolution of all stakeholders that can enable the economy to withstand the unprecedented stress. The resilience built during the last two years should be able to guide the economy through the current geopolitical risks.