Indian Economy Amid Changing World Order: What Lies Ahead?

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Pandemic, inflation, and war have taken not only a toll on the global economy, but also the world economic order. Certain developments indicate the landscape for the world is probably going to change in a manner that we are not able to grasp today. In the era of Artificial Intelligence (AI), we are not sure what to see going forward after, say 10-20 years.

Further, in the backdrop of the Russia-Ukraine war, the process of de-dollarisation (avoiding the debate in full form) is gaining momentum, and instead of one currency gaining supremacy, it seems that bilateral trade between different countries will take place in a fragmented manner. We are also not sure whether the Israel-Hamas conflict would be temporary or in which direction it would turn depending on further possible retaliatory actions by interested parties in this conflict. A prolonged conflict might adversely impact the oil prices. For India, such developments would have adverse impact on its external trade balance. However, the scenario is sketchy as of now.

According to the IMF’s October 2023 “Global Financial Stability” report, in the event of an abrupt tightening of financial conditions, adverse feedback loops could be triggered and again test the resilience of the global financial system. The global credit cycle has started to turn as borrowers’ debt repayment capacity weakens and credit growth slows. The IMF’s growth-at-risk measure summarizes this assessment, indicating that risks to global growth are skewed to the downside. In a scenario wherein the “hoped-for soft landing” does not materialize, investors pull back from risk taking, and financial conditions stiffen toward the long-term average, the growth-at-risk forecasts the growth distribution to be even more firmly skewed to the downside.

For instance, mortgage borrowers will continue to face a higher repayment burden, leading to a slowdown in housing activity and a further decline in home prices. In US, as highlighted by Lorie K. Logan, financial conditions have tightened notably in recent months, and if long-term interest rates remain elevated because of higher term premiums, there may be less requirement to raise the fed funds rate. However, to the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more. Therefore, the Dallas Fed President will carefully evaluate both economic and financial developments to assess the extent of additional policy firming that may be appropriate to deliver on the FOMC’s mandate. Vice Chair Phillip N. Jefferson has iterated in a similar tone that after increasing the target range for the federal funds rate by 525 basis points since early 2022, the FOMC is in a position to proceed carefully in assessing the extent of any additional policy firming that may be necessary. Despite certain declines, the 10-year treasury note in US and 30-year treasury bond yields are still hovering around 4.66% and 4.83% respectively.

While most of the developed economies are largely facing inflation challenges, the “giant” Chinese economy is struggling with property-related issues, as well as increasing strains on local government financing. The decline in the equity prices have triggered a downturn for the Chinese currency renminbi. Easing of policy rates and other stimulus measures by the People’s Bank of China have not been effective in augmenting business sentiments.

For India, certain positive developments have taken place…
  • The tempo is high after the inclusion by the J.P. Morgan in its emerging market debt index that will include 23 Indian government bonds (falling under the “fully accessible route” for non-residents) with a notional value of $330 billion into its Government Bond Index-Emerging Markets (GBI-EM) benchmarks from June  2024. This is likely to channelise billions of dollars flowing into the G-Secs market, thus streamlining the costs of the government borrowings.
  • There is other positive news for India as well, for instance, CLSA (the brokerage owned by China’s CITIC Securities) has increased its India exposure with a supportive macro-outlook, by assigning a weighting of 18.2 per cent to India, that is 301 basis points higher than the nation’s weighting of 15.1 in the MSCI All Country Asia Pacific ex-Japan index.
  • According to the IMF’s October update of its World Economic Outlook., India’s economy will grow 6.3% in 2023, an increase from an earlier forecast of 6.1%, whereas RBI has projected a real GDP growth of 6.5% for 2023-24.

Further, India becomes a brighter spot amid global economic doldrums, and despite certain hiccups and controversies regarding socio-economic, human rights, growth versus inequality issues, India remains the fastest growing economy among emerging markets.

Morgan Stanley, in its report dated 29 May 2023, has highlighted that “This India is different from what it was in 2013. In a short span of 10 years, India has gained positions in the world order with significant positive consequences for the macro and market outlook.” Goldman Sachs in its Asia-Pacific Portfolio Strategy, in a report titled as “Investing in India’s medium-term growth story: Identifying potential multi-baggers” (June 01, 2023) has highlighted that India has delivered a nominal GDP CAGR of 10% over the past two decades between 2002 and 2022, second only to China and surpassing most other Asian and developed market peers.

The Central Bank of India, RBI can take pride in its effective management of the banking and financial system of India that is reflected in the “Governor of the Year award by Central Banking” to the RBI Governor Shaktikanta Das. Nevertheless, India needs to continue its focus on maintaining its macroprudential policies, given the increasing complex global geopolitical developments.

About the Authors
Mr. Vipin Malik is currently the Chairman and Mentor of the Infomerics Ratings. Earlier, he was a member of the Board of Governors of the Reserve Bank of India (1994-2001) and Bharatiya Reserve Bank Note Mudran Private Limited (2002-2005) – Currency Printing establishment.
Mr. Sankhanath Bandyopadhyay is currently an Economist at Infomerics Ratings. He has been working in the economics profession for the last 16 years, and worked in many research institutions.

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