In these uncertain times, how resilient is the Indian economy to the global economic turmoil?


Just a few years after the Covid-19 pandemic disrupted the global economy, the world is once again facing widespread economic turbulence. Inflation rates continue to be far higher than historic levels, not necessarily due to what economists describe as overheating, but due to supply chain disruptions due first to the pandemic , then the ongoing Russian-Ukrainian war. Most experts believe things could get worse due to winter gas shortages, especially in Europe. A rise in gas prices will not only put a strain on household budgets due to heating costs, but also disrupt business cost calculations due to a sharp increase in energy costs. As central banks around the world raise interest rates to keep inflation in check – there is always debate about the effectiveness of raising rates in overcoming supply-side inflation – rates growth should suffer another blow.

While the Indian economy continues to be a rare shining sport in the world, at least in terms of growth rate, the coming global downturn and volatility in currency and capital markets have not left it unscathed, both on the macroeconomic stability front and on the general level. growth. How well is India’s economy weathering the coming global economic winter? Here are three tables that try to answer this question.

Is India Facing a Balance of Payments Crisis?

At least two factors have put this issue on the agenda. RBI has used a significant portion of foreign exchange reserves to stabilize the value of the Rupee over the past few months and yet the Rupee has lost value against the US Dollar. Does this mean that India can face a balance of payments crisis? One of the most commonly used measures of balance of payments resilience suggests that it would be premature to raise the red flag at this stage. India faced its biggest balance of payments crisis in 1991, which kind of triggered the economic reform agenda. At the time, India’s foreign exchange reserves could have paid less than a month’s worth of its import bill. Foreign exchange reserve coverage of imports has steadily increased since then and has remained at comfortable levels since then, barring occasional volatility. Data from the Center for the Monitoring of the Indian Economy (CMIE) shows that India’s foreign exchange reserves would have paid for 8.8 months of imports in the month of August 2022, the latest period for which this data is available. While this looks like a sharp decline in import coverage of over 28.1 months in April 2020, it is more a result of the pandemic stopping imports completely and the lower import bill due to a sharp drop in crude oil prices. Sure, this multiple has been higher in the past, but it still hasn’t fallen to alarming levels.

Will a global slowdown hurt India’s growth?

It will do so, via two routes. Exports have played an important role in the post-pandemic recovery and with declining global growth, particularly in advanced economies, India’s export earnings are bound to face headwinds. In fact, this process has already started, as shown by the monthly export and import data. “Exports have been a major driver of India’s post-pandemic recovery, but are slowing down with weak global growth. Medium and low tech exports have been slowing since June. Export volumes of high-tech goods showed their first signs of slowing in August,” said a September 26 research note from Pranjul Bhandari and Aayushi Chaudhury of HSBC Research. The other way a global recession will negatively affect India’s growth is through weakening business confidence due to heightened global uncertainty. This does not bode well for the revival of the private cap-ex cycle. Yet the fact that India is not as tied to the global economy, especially manufacturing supply chains, as some other countries (including the Southeast Asian Tigers) could prove a redemption factor.

Will moderating global commodity prices, especially oil, help?

When the Department of Finance released its economic study ahead of the January 31, 2022 budget, it was looking at average crude oil prices for the 2022-23 fiscal year at $85 a barrel. This assumption seemed very far from reality after the Russian invasion of Ukraine on February 24. Crude oil prices peaked at over $120 a barrel in June. Since India imports more than 80% of its energy needs, the rise in crude prices is a triple whammy as it has a negative impact on inflation, the trade balance and the fiscal situation. The only benefit that the current recessionary environment has brought to the Indian economy is the moderation in energy prices due to the prospect of lower demand. In fact, crude prices have dipped below $85 a barrel over the past two days. While most experts don’t see prices collapsing to much lower levels any time soon, and the depreciation of the rupee has neutralized the fall in energy prices to some extent, policymakers have a much-needed cushion in terms of cheaper energy prices as they strive to ensure lower energy prices. landing for the Indian economy in an extremely turbulent global environment.


    Roshan Kishore is Data and Political Economy Editor at the Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.
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