The economic challenges during the Covid period, the Russia-Ukraine war, and rising inflation affected the world economy but the Indian economy is showing resilience. According to a recent survey by Bloomberg, many countries of the world are facing recession but India is still untouched by it”.
WHY INDIAN ECONOMY WILL SEE ‘ACCHHE DIN’ FOR NEXT FEW YEARS
The expert consensus estimate on GDP growth rate for the first quarter of 2022-23 (Q1FY23) was around 15%. To that extent the 13.5% growth rate is a negative surprise. Nevertheless, at 13.5%, India’s GDP growth is 2.8 times higher than the average GDP growth for the 20 largest economies, which is 4.9%. India is still the good exception in a world already slowing down.
If we look at seasonally adjusted GDP growth, there’s a clear pick-up in economic momentum – quarter-on-quarter growth in Q1FY23 is 5.6%, the highest seasonally adjusted growth achieved in all first quarters since 2012-13.
Let’s now break down the GDP data to get a more nuanced picture.
ALL THE GOOD NEWS
An interesting nugget first: Home sales in China have fallen for 11 months in a row, the longest slump since China created a private property market in late 1990s. In contrast, property sales in India are booming, registering 60% year-on-year growth in Q1FY23.
TURNING TO MACRO FUNDAMENTALS:
- Private consumption has improved on the back of good urban demand, which is getting support from contact-intensive services. Rural demand is likely to pick up pace.
- Real private final consumption expenditure, which declined by Rs 4.77 trillion in Q1FY21 owing to the pandemic, is now 110% of the pre-Covid level.
- Financial services show considerable revival, 9.2% growth on the back of credit growth. Credit disbursed in FY23 is close to Rs 6 trillion, with employment-intensive MSMEs and retail loans being main drivers.
- Most services have showed robust growth. Hotels and tourism sector growth is at 25.7%. Other services such as health and recreation also showed growth; contact-sensitive sectors have recovered considerably.
Among other positives is investment growth, with gross fixed capital formation registering an increase of 20.1%. Even CMIE data on new project announcements by the private sector for June 2022 showed activity was 117% of the pre-Covid level.
On the value-added side, the performance of agriculture was robust at 4.5%. However, a 40% average rainfall deficit in UP and Bihar suggests that the paddy output may see some downsides this year.
THE SURPRISE NOT-SO-GOOD NEWS
Baffling many experts, manufacturing growth plummeted to 4.8% in Q1. Reasons for this low rate are somewhat difficult to gauge as all volume indicators for this sector show no signs of deceleration. IIP for manufacturing registered a growth of 12.7%. WPI inflation for manufacturing remained stable at 10.3%.
To understand this, look at the following data.
- Profit after tax (PAT) of 4,000-odd companies grew by a staggering 13063% in Q1FY22, a result of the extremely low base in Q1FY21, which was the lockdown period.
- In Q1FY23, PAT grew by 11%, a normal rate. Low real growth for manufacturing may in part be a reflection of this enormous statistical change between Q1FY22 and Q1FY23.
- Plus, the manufacturing sector in Q1 took a hit from the Ukraine war-induced spike in commodity and energy prices.
WHY WE NEED TO BE CAUTIOUS
GDP data shows clearly that on the external front the outlook is uncertain. In Q1FY23, export growth was 14.7% and import growth was 37.2%. The sharp jump in imports and rupee depreciation has brought down net growth of exports relative to GDP. This is a drag on economic outlook, especially with declining demand in key export regions.
Q1 GDP data also suggests that RBI’s FY23 growth forecast of 7.2% may be set for a downward revision, assuming no big changes in the remaining quarters.
INDIA’S MEDIUM TERM IS GOOD
For a good indicator of the economy’s medium-term prospects look at the latest iPhone 14 manufacturing plans at Foxconn’s Chennai facility. The huge order is a clear sign that India is finally making it big in the China-Plus-One manufacturing location plans of MNCs. And India’s status as a preferred spot in the global supply chain can range across commodities – from chips to coal. The pandemic changed a lot of plans and perceptions, and one of the key beneficiaries is India.
Let’s also look at the performance of the rupee.
- The rupee has fallen less against the dollar than currencies like the euro or the yen, which have had much sharper slides vis-à-vis the US currency. This does reflect the strength of the Indian economy.
- Further indication of the underlying strength is that yields on government debt have remained steady despite considerable global economic volatility, including in capital inflows and oil prices.
- Pressures on growth are coming in the short term, but the economy is entering a period of good, steady growth over the next few years, a prediction that can be made about very few major economies.
DURING THE LAST 8 YEARS, CENTRAL GOVERNMENT HAS BROUGHT MANY CHANGES
- The various economic measures were undertaken only when it was compelled. For the first time since 2014, various measures were taken with an eye on long-term benefits.
- Several steps including the Bankruptcy Code, a special focus on MSMEs, promoting a conducive environment for industries, and investment to Ease of Doing Business were undertaken to boost the economy.
- The economy which plummeted to a negative level during the Covid period gained momentum after two quarters.
- Every rating agency in the world extolled this achievement. The latest Bloomberg survey highlights the resilience of the Indian economy.
- According to the survey many countries of the world are facing a recession in the next one year. Major economies of the world including Asian countries are facing the risk of recession.
- Due to lockdown during the Corona period and the Russia-Ukraine war, the risk of recession is much higher in countries like America, Japan, and China along with European countries.
- But it is heartening to note that India is completely out of danger of recession. According to the Bloomberg survey, India is the only country where the probability of recession is zero.
- The Bloomberg survey says that the probability of Asia going into recession is 20-25 percent, compared to 40 percent for the Americas and 50-55 percent for Europe. According to the report, there is an 85 percent chance of Sri Lanka going into recession next year.
CORE SECTOR PRODUCTION IN JUNE SHOWS A PHENOMENAL RISE
Eight Core sector output rises by 12.7% in June against 9.4% in the year-ago period. The eight core sectors include coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity. The share of the eight core sectors in the Index of Industrial Production (IIP) is 40.27 percent. According to the government data, in the month of June this year, an increase of 31.1 percent in coal production, 15.5 percent in power generation, 19.4 percent in cement production, 15.1 percent in refinery products, 8.2 percent in fertilizer production, 3.3 percent in steel production and 1.2 percent in natural gas production has been registered.
RUPEE REGAINS FOOTING AGAINST US DOLLAR
Due to the Russia-Ukraine war, markets around the world are facing inflation. At the same time, the effect of increasing the policy interest rate by the Central Federal Bank of America some time ago had an impact on the currencies of other countries against the dollar including the Indian rupee. The Indian currency, which fell by Rs 80 against the dollar, is recovering again reaching the level of 79.64 by 9 August. According to Finance Minister Nirmala Sitharaman, “The government is monitoring the situation. The Reserve Bank is keeping a very close watch on the exchange rate of the rupee. But the rupee has outperformed the dollar against other currencies.”
AN EVALUATION OF OTHER CURRENCIES AGAINST THE DOLLAR
The rupee has depreciated 7 percent against the dollar in 2022. While Japan’s yen, Europe’s euro, and Sweden’s krona have fallen by an average of 10 percent against the dollar this year. Notably, the rupee has strengthened against these currencies. The Euro is not performing well against the dollar. In July, the euro has seen a tremendous decline twice against the dollar. In July 2021, one dollar was equal to 0.84 euros. Whereas as of August 9 it is at the level of 0.98 euros. The Japanese yen is also depreciating against the US dollar. On June 22, 2022, the yen fell to a 24-year record low of 136.45 per dollar. The price of the yen was around 109.98 in July 2021, it fell to 138.80 yen in July 2022.