For the month of December 2022, the purchase manager index (PMI) for India was 59.4, almost touching multi-decadal highs. PMI above 50 is taken to mean that an expansionary phase follows as confidence among participants is high and readings below indicate a contractionary phase. For large G20 countries like Brazil, China, France, Germany, Japan, the UK and the US, the index ranged between 44.6 and 50. The wide divergence between India and the other countries is one further metric which highlights the different macroeconomic circumstances of and outlook on the Indian economy.
The neighbourhood around India: This widespread optimism in and about India contrasts with countries in its south-east Asian neighbourhood, where many are battling various stages of economic crises. Sri Lanka has had a tumultuous 2022, Pakistan has been in various conversations with IMF, Bangladesh has sought IMF assistance, and Nepal has only a few billion dollars of reserves left. This comes at a time when China reported its slowest annual growth in decades (of 3% in CY2022) and when its population has shrunk. The geostrategic and geopolitical implications of these economic crises need to be part of the global development strategy.
Inflation: One macroeconomic issue that has recently dominated the attention of policymakers, and not just the central bankers, across the world in 2022: inflation. While India did see a bout of consumer price inflation in CY2022, it peaked at 7.8% in April 2022 and has broadly slid downwards to the 5.7% reading in December, within the RBI’s range of 4%+/-2%. This rate of inflation is relatively benign compared to the large impact that in the US and the EU. Indeed, India is in a rare situation where the inflation differential between India and the US is negative, i.e., India’s inflation is lower than the US’. This has led to Indian yields being more stable rather than rising as significantly as the global yields have. A stable yield curve has also meant relatively stable equity markets: before the current short-sell turmoil, India was the only large equity market to report positive trailing 12-month returns.
Supply chains: Food and fuel prices contributed significantly to global price rise in 2022. This is not a surprise given that Russia is an exporter of crude and Ukraine is known as the breadbasket of Europe. The conflict between these nations led to supply shocks in both the markets. The prices for downstream products, like fertilizers, also faced upward pressures. As the markets adjust to these supply shocks, or as some of the supplies restart from these countries, 2023 will possibly lead to price corrections. The supply chains which had gummed up due to Covid are now reopening and that is reflected in the falling freight rates across the world which are down around four-fifths from recent highs.
Climate: 2022, the scientists pointed out, was one of the hottest years on record. India faced an extended heatwave in March which impacted the output of the winter crop, especially wheat. For the world, this heatwave came at a particularly inappropriate time as the Ukraine wheat trade started to stall. Monsoons in India turned out to be normal and this eventually led to softening food prices – this has fed into the lower inflation numbers for India that we discussed above. Climate related events will continue to surprise the world as they did to Pakistan which had devastating floods in 2022. The need to act on mitigating and adapting to climate change only gets more urgent every year. Global cooperation, at forums like COP and G20, will be required in getting the financing for sustainability becoming more widely available.
Geopolitics: Global geopolitical actions like financial and technical sanctions, tariffs, and localization via friend-shoring and large government incentives will shape industrialization and trade flows in the coming year and decade. Countries have put in place industrial policies that prioritize local control over key industries: the AtmaBharat initiatives of India, the Made in China 2025 policy, the Inflation Reduction Act of the USA, are some of the large initiatives. These will also mean that capital investments will move to countries with the strongest incentive structures. It is pertinent to ponder whether such capital will be deployed using an economic rationale (and hence will earn above the cost of capital) or whether these will be fiscally driven? A world less bound by trade and capital ties may also find it more difficult to come together on climate policy making. The walling of European Union markets via the carbon border adjustment mechanism (CBAM) can further increase barriers to trade, even as they seek to potentially address the longer-term climate issue.
Prepare now
In a world of ‘poly-crises’ as noted above, India continues to be in a strong macro-economic situation. The underlying strength of the Indian economy is reflected in the continued underlying growth in production (cement, steel, coal), consumption (air and rail travel, passenger vehicle sales, power and fuel offtake), and transactions (e-way bills, UPI, FasTag collections, etc.)
The interaction point between India and the world is via its external account. With goods exports settling down at a lower level from the high levels seen a few months ago, the many crises of the world can seep into to Indian macroeconomy via the external account. This is not unlike the sharp appreciation of the USD in 2022 which reverberated through the capital account with FPIs pulling out money from the Indian markets. Economic challenges of India’s neighbourhood could create uncertainties. India’s G20 Presidency can work towards building a global consensus on how to deal with the impact of economic crises on the developing economies.
The author is with the National Investment and Infrastructure Fund Limited. Views are personal.
Akhilesh Tilotia 