Indian economy: Five big bright spots that are working for India as advanced economies watch recession

The US Federal Reserve has made another giant rate hike of 75 basis points, making it clear that it wants the US economy to slow significantly in order to reduce runaway inflation. The fact that 75 is the new 25 shows that the Fed’s earlier lag will now cost the United States dearly as it heads into a recession.

Other advanced economies are raising rates as they battle their own challenges as Europe grapples with a harsh winter. Putin’s latest threat to escalate the war in Ukraine will only exacerbate the situation.

Amid all the gloom shrouding advanced economies, India has emerged as an island of hope for global investors as its strong domestic demand rebounds from pandemic-induced lethargy.

The latest macroeconomic assessment from the Ministry of Finance indicates that the consumption-led recovery, especially in contact-intensive sectors, will support India’s growth in the coming months.

S&P Chief Global Economist Paul Gruenwald is also highly optimistic about India’s growth, seeing it as an exception to a near-universal slowdown. On the forex front, he said the RBI using around 10% of its reserves to stabilize the rupee’s volatility is reasonable.

Here are five big bright spots for India amid a slowing global economy:

1. Mainly imported inflation

A recession in advanced economies will significantly reduce the risk of imported inflation for India as commodity prices fall. India imports more than 80% of its energy needs and lower oil prices will also have a cascading impact on other sectors. The RBI and the government have collectively taken action to bring inflation down. While the RBI has raised interest rates, the government has made fuel tax cuts to help lessen the impact on the common man. He also imposed restrictions on wheat and rice exports to control domestic prices.

2. Stable Rupee

While the US Fed’s rate hike sent the rupiah down today, a recession in advanced economies will cool commodity prices, meaning demand for dollars will decline. This will help stabilize the rupee. A rebound in global equity flows will also serve to support the rupiah.

3. Deficit under control

Although a recession in advanced economies will cast a shadow over India’s exports, lower commodity prices will help offset some of the impact and a domestic recovery would mean higher imports will cost less . A stronger rupiah due to less demand for dollars and a rebound in inflows will also lead to a lower import bill.

4. Fastest growing economy

A pick-up in investment spending will boost India’s GDP growth as companies align their investment strategies with a rebound in domestic demand. The capital goods sector, an indicator of investment in the economy, is showing robust growth. Coupled with strong domestic demand, India is expected to grow the fastest in the world, making it an ideal location for global investors.

5. Change supply chains

In the longer term, the shift of global supply chains from China to other regions holds promise for India’s emergence as a manufacturing hub. The recent investment commitment in areas such as semiconductors by Vedanta-Foxconn is a strong affirmation of the Modi government’s manufacturing ambitions.


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