Indian Economy : A bright spot in a gloomy (recessionary) Global Economy

Palki Sharma Upadhyay

India has emerged as a bright spot in an otherwise gloomy global economy. Many economists believe that India will soon become the world’s growth engine. This assessment is significant when many major economies may face recession.

To understand India’s ascent on the global economic map, we should go no farther than India’s erstwhile colonial ruler, the UK, in which Gareth Thomas, MP and the Shadow Minister for Trade Policy, recognised India’s stature as the growth engine of the world economy. In a Parliament speech, he urged British students to learn Indian languages such as Gujarati, Punjabi, Bengali and Urdu to engage with Indian businesses effectively. It implies that the UK believes India will soon become the global economic superpower, and they want their fellow citizens to benefit from this insight.

1. The International Monetary Fund (IMF) and the World Bank endorse India’s stature as the future growth engine of the world economy

Many economists are confident about India’s economic prospects. Hamid Rashid, the head of Global Economic Monitoring at the United Nations (UN), acknowledged India’s growing stature in the world economy. He quotes two significant observations about the Indian economy.

A. India has been remarkably successful in containing and taming the inflation juggernaut that destabilised many developed economies.

B. India’s intent to reduce the trade deficit with its ‘Low Import Bill’. To be specific, India has been successful in containing the burgeoning energy expenses.

India’s Prime Minister Narendra Modi also revealed that the IMF has recognised the growing economic stature of the Indian economy. The IMF viewed India as a critical partner in facilitating international trade and finance. The World Bank says India is in a much better position to deal with global recessionary and inflationary headwinds.

We should notice that supranational organisations like the IMF and the World Bank have endorsed India’s stature. Today, the world is grappling with the fear of global recession and these supranational organisations are trying their best to avoid any significant negative repercussions of such an event. The Russia-Ukraine war has negatively impacted the growth rate of the global economy. The biggest economies are struggling to stand on their feet – the US citizens are fighting the repeated Government shutdowns over raising the federal debt ceiling; China is still not able to contain and manage the spread of the deadly coronavirus; the UK is staring at the worst and a prolonged recession in G7, and the Japanese economy shrank for the first time last year. Despite these gloomy developments elsewhere, the World Bank has recognised the resilience of the Indian economy.

2. What makes India a bright spot in world economy ?

A. Strong pandemic recovery, increased private consumption and higher GST collections helped India to pose a handsome recovery : India recovered strongly from the pandemic slump. There were no large-scale lockdowns last year. As a result, the business activity resumed seamlessly without any hiccups.

The Russia-Ukraine war dealt a big blow to Europe and other major economies. However, India managed to deal with the adverse external environment effectively. Private (household) consumption accounts for 60% of India’s GDP. It means, unlike some other economies, the money you and I spend boosts India’s GDP. The increased private consumption helped the Indian economy rebound strongly. India’s tax collection rose significantly last month. The GST collections have increased by more than 15% compared to the previous year to a little more than $18 billion. This is a significant positive development as it indicates a robust business activity.

B. Decoupling from China : India as an alternative investment destination

After the pandemic-induced supply chain disruptions, many countries started to find an alternative to China. They adopted a ‘China plus one strategy’. This targets gradual decoupling from China by engaging with one more business partner (country) as an alternative to China. The major economies are diversifying their supply chains to insulate themselves from China.

There are many reasons for such a change in stance : Crackdowns on business owners, erratic policies, trade wars, a shrinking workforce, Xi Jinping’s authoritative rule, etc. As a result, China lost its credibility during the pandemic slump, and many countries started to find alternatives.

India gained immensely from these developments. Last year, Apple started manufacturing its latest iPhone in India. Apple typically engages with many manufacturers for its iPhone, and these companies are looking to expand their operations in India. More than a dozen such companies are ready to diversify their production away from China. Samsung, another smartphone giant, manufactures 120 million units in India every year. Google, the global technology giant, is also considering a similar switch to India. Foxconn, a Taiwanese semiconductor giant, has announced a joint venture with Vedanta, the Indian mining giant, to set up semiconductor plants in India. Chipmakers from Taiwan are eying Indian counter-parts for similar joint ventures, for setting up production facilities in India. In summary, India has emerged as the go-to destination for international businesses.

C. Major Indian conglomerates invest heavily in India

Major Indian conglomerates have also invested heavily in India. The targeted subsidies for the 14 sectors granted by the Government have been successful in luring these business houses. These sectors include electronics, drugs, drones and batteries. Many companies have started to take advantage of these opportunities (subsidies) that helped the Indian economy to sustain a higher growth rate.

An assessment by Morgan Stanley, an American multinational investment bank, indicates that India is on track to become the world’s third-largest economy by 2027, surpassing Japan and Germany, and the Indian Stock market will become the third-largest stock market in the world by 2030. The assessment cites enhanced investment in the technology and energy sector to be the driver for the India story.

In addition, an assessment by S&P Global, the financial information and analytics giant, also indicates that India’s economy will overtake Japanese and German economies by 2030 and that Indian households will become the largest spenders among the G20 economies. India’s G20 Presidency this year will also open an array of fresh opportunities for the economy.

3. India needs to be careful to reap the maximum benefit of these unprecedented growth opportunities

India also faces some risks that may prevent it from realising the maximum benefit of these unprecedented growth opportunities. The first and foremost is the fiscal deficit. India spends more than it earns, which is usual for all developing counties, but this causes a shortfall. This fiscal deficit is more than 6% of the GDP, and it needs to come down for the higher growth rate to sustain. Hence, the Government should do everything feasible to reduce expenses.

The second risk is global uncertainty. The Russia-Ukraine war is far from over. The Western powers are trying to block Russia economically and force its withdrawal from Ukraine. They want to limit Moscow’s earnings from oil exports. India needs to be careful about its oil imports since it imports a sizeable chunk from Russia. Any forced production cuts on Russia will directly impact India’s oil expenses and fuel inflation.

However, barring these few risks, a lot is going in India’s favour, and it should reflect in an even more robust and resilient Indian economy.

– Palki Sharma Upadhyay (Managing Editor, Firstpost YouTube Channel, 31.1.2023)

Despite gloomy developments elsewhere, the World Bank has recognised the resilience of the Indian economy !