India Is Poised to Weather the Coming Global Economic Storm
9 MIN READOct 28, 2022 | 15:52 GMT
The Indian economy retains solid momentum and multiple advantages compared with many other lower-middle-income countries, which should enable India to emerge relatively unscathed from the impending global economic downturn and intensifying financial volatility. Following the COVID-induced recession in 2020, India's economy rebounded very strongly in 2021 and has maintained solid growth ever since. India has also overtaken China as the fastest-expanding economy among larger emerging economies. While inflation remains high in India due to global energy and food price shocks, it is not overwhelming. And while the value of India's currency has dipped, the rupee has depreciated far less than currencies in other countries due to a combination of central bank monetary tightening and foreign-exchange market intervention.
Indian real GDP growth averaged 5.5% over the past decade, fueled by solid investment and favorable demographics. According to the IMF, the economy will grow 6-7% in real terms this year and over 6% in 2023, supported by an investment ratio of over 30% of GDP. By comparison, China will only grow 3.2% due to both cyclical factors (such as extensive COVID-19 restrictions), as well as structural factors (such as Beijing's shift away from investment-intensive real estate and infrastructure-driven growth).
India's inflation will average 7% in 2022, largely due to the energy, commodity and food price shocks resulting from the ongoing Russia-Ukraine war. This is high but not excessively so by India's recent standards, with the country's consumer price inflation averaging 5.8% in 2012-2021.
The rupee is down only 10% against the U.S. dollar in 2022, much less than the currencies of advanced economies (the U.K. pound, for example, is down 16% against the dollar). This comes as the Reserve Bank of India (RBI) has increased its policy rate to 5.9% from 4% earlier in the year to contain inflation.
India is among the fastest-growing economies in the world's fastest-growing region. In the broader Asia-Pacific, only Vietnam and Bangladesh are currently registering higher economic growth rates, but their economies are only a fraction of the size of India's economy.
In contrast to many other emerging economies, India has relatively solid economic fundamentals. Many low-income and lower-middle-income countries are experiencing severe financial challenges as the outlook for the global economy darkens, with the IMF predicting that one-third of countries will enter a recession next year. Several teeter on the verge of financial collapse and, even if they don't collapse, many will still be forced into painful, growth-reducing macroeconomic adjustments, major debt restructurings, or both. India's financial position, however, is comparatively solid. India has an investment grade rating from all three major international credit rating agencies, implying a very low probability of sovereign default and distress. To be sure, India's government debt is high by emerging markets standards and its fiscal deficit is large. But thanks to solid nominal economic growth, the country's debt ratio is projected to stabilize, ensuring medium-term debt sustainability. India's external debt is also very low, further reducing its financial vulnerabilities. In addition, a combination of sizeable foreign exchange reserves and a flexible exchange rate affords policymakers sufficient room to adjust without causing broader economic or financial problems in case of intensifying balance-of-payments pressures. Compared with many other emerging economies, India is also much less dependent on exports and is therefore far less affected by global economic shocks.
India's government debt exceeds 80% of GDP and its fiscal deficit is nearly 10% of GDP, which is high even by emerging markets standards. But strong underlying nominal economic growth will help stabilize the debt-to-GDP ratio at current levels, meaning these higher debt and deficit figures should not weigh on India's economic outlook.
The bulk of India's government debt is denominated in local currency and held by domestic investors, which substantially reduces financial risks. Non-resident holdings of general government debt total just 5%, whereas a more typical number in other emerging markets is 30%.
The external debt-to-GDP ratio is a mere 20%, which is quite low compared to an average ratio for emerging markets of 40-50% of GDP. Further, the RBI's foreign currency reserves are roughly equivalent to India's outstanding external debt, which sharply limits external debt-related risks.
In terms of external liquidity, the current account deficit is set to increase to 3-4% of GDP this year, mainly due to higher commodity prices. However, this is more than fully financed by stable foreign direct investment flows.
Portfolio outflows driven by higher U.S. interest rates are putting some pressure on India's balance of payments, but New Delhi has more than enough financial firepower to mitigate this pressure. The RBI has been intervening in the foreign exchange market to smooth out volatility, spending roughly $100 billion year-to-date and leaving foreign-exchange reserves at a sizeable $530 billion.
India's export-to-GDP ratio is only 19%, which is significantly below the unweighted global average of 29%. It's also much lower than countries like Vietnam, where exports exceed 100% of GDP.
Adequate food stocks in the country and continued government intervention to manage high prices also reduce the threat of food insecurity and related political risks in the coming months. India's current stock of key staples like rice and sugar is adequate and the government has restricted wheat and rice exports to prevent domestic price increases and possible shortages. New Delhi has also continued to foot the fertilizer subsidy bill in the face of rising international prices to shield farmers from higher input costs. In addition, the government has maintained a free grain distribution scheme for about 500 million poor people to restrict the impact of rising prices on lower-income households. These continued subsidies will see the Indian government breach its fiscal deficit target of 6.4% of GDP by a significant margin, but the larger deficit will remain manageable as food prices have begun to fall from their peak earlier this year and India's finances remain generally strong. India's expected food security will help maintain political stability in the country, as the ruling Bharatiya Janata Party (BJP) already enjoys popular support and will not be challenged by large-scale social unrest due to food inflation.
Russia's February invasion of Ukraine caused significant disruptions to global food supplies by undermining the former's ability to export its main commodity: wheat. The fallout increased global demand for Indian wheat, prompting domestic producers to ship more of their products abroad. This led to price increases in India and fueled fears of potential wheat shortages. In May, the government intervened by imposing wheat export restrictions to mitigate prices and shore up domestic supplies of the staple grain.
Beginning Sept. 9, India banned the export of broken rice (widely used for animal feed and in some places human consumption). As a preventative measure against the risk of a low yield this season due to uneven rainfall distribution, the government also raised duties on exports of other rice varieties, except for basmati rice (a key commodity that generates significant revenue),
As of Oct. 1, the Indian government had a combined stock of 51.14 million tonnes of wheat and rice, which is 65% more than the required buffer stock during this time of year, according to the Food Corporation of India. This has prompted the government to extend the free food scheme, which is aimed at enabling poor households to offset inflationary prices during the upcoming festival season, until December. On Oct. 18, the government also raised the minimum support price (the rate at which the government buys grains from the farmers) for both wheat and mustard (another key food item) by 5% and 8%, respectively. These moves are aimed at boosting production in the upcoming winter crop cycle that lasts from October to March.
Food and fertilizer subsidies represent about 10% of India's total budget expenditure, or approximately $40 billion. Revised government subsidies increase the fertilizer and food subsidy bill by approximately 50%, or about $60 billion.
Compared with some of its neighbors, India also has a lower risk of energy insecurity thanks to its diverse sourcing options, as well as its sufficient fiscal space to support imports. New Delhi's neutral stance on Russia's ongoing war in Ukraine has enabled India to import cheaper Russian crude oil since March. India will continue to source Russian oil as long as it remains an affordable way to secure domestic energy supplies, which will likely remain the case for at least several more months. However, the risk of future Western sanctions will persist amid the G-7's push to institute a price cap on Russian oil, along with the EU ban on insuring tankers that ship Russian oil (which is slated to take effect in December). To mitigate the impact of the new EU sanctions and a potential G-7 price cap, the Indian government could opt to cover the logistics costs of oil imports with Russia by paying the added shipping and insurance costs itself. Meanwhile, major state-owned oil refiners in India are also exploring long-term deals with countries like Brazil, Columbia and the United States to cope with potential supply-side disruptions in the coming months. Additionally, the government has controlled domestic fuel price rises through excise duty cuts to petroleum products and direct financial assistance to energy retailers. Comfortable levels of coal stocks will also ward off a repeat of India's 2021 energy crisis, which led to power outages in most states (with Rajasthan, Gujarat, Haryana, and Andhra Pradesh being the hardest hit). With enough fiscal room to cover exigencies, along with relatively secure (and diverse) sources of imports, India's energy outlook thus remains stable at a time when many other countries are struggling to keep the lights on without going broke.
The Indian cabinet has agreed to give $2 billion in aid to oil marketing companies that have been footing the bill of high energy prices without passing them on to consumers in order to control inflation.
Indian refiners like Indian Oil Corporation have inked deals with Brazil and Colombia for long-term crude contracts to prevent major disruptions in energy supply in the coming months.
India has sufficient coal stocks, which is crucial to its energy security given that coal generates about 70% of India's electric grid.
