India Economy Is On A Revival Mode But Next Fiscal Will Be Challenging

The preliminary official estimates by Ministry of Statistics has corroborated multilateral and other rating agencies forecast that India’s economic growth would be around 7 per cent in financial year 2022-2023. This only confirms that Indian economy is on a revival mode. The projected GDP growth may be less than 8.7 per cent achieved last financial year. The year 2021-2022 was the first year after Covid Pandemic and the growth looked impressive because of base effect as in the previous 2020-2021, India clocked a negative growth due to lockdown and other disruptions.

This indicated that the economy has certainly rebounded from the deep pandemic-related downturn. The 8.7 per cent growth in FY 21/22 enabled the total output in the economy to be above pre-pandemic levels and that the momentum continued this fiscal supported by a recovery in the labour market and increasing credit to the private sector, according to the International Monetary Fund, which recently concluded 2022 article IV consultation with India.

The country report that emanated from the IMF after such annual consultations indicates that India is in a bright spot but needed to push further structural reforms. The growth is however expected to moderate in the face of less favourable outlook and tighter financial conditions. Real GDP is projected to grow at 6.8 per cent and 6.1 per cent in FY 2022-23 and FY 2023-24 respectively. This reflected broad based price pressures and inflation is projected at 6.9 per cent in 2022-23 and is expected to moderate only gradually over the next year. The current account deficit is expected to increase to 3.5 of GDP this financial year as a result of both higher commodity prices and strengthening import demand.

The IMF however said the government and RBI policies are addressing new economic headwinds. These include inflation pressures, tighter global financial conditions, fallout from the war in Ukraine and associated sanctions on Russia, and significantly slower growth in China and advanced economies. The authorities have responded with fiscal policy measures to support “vulnerable groups and to mitigate the impact of high commodity prices on inflation.” Monetary policy accommodation has been gradually withdrawn and the main policy rate has been increased by 190 basis points so far in 2022.

Though IMF has acknowledged India’s efforts to deal with the emerging economic situation, It has also highlighted the pitfalls that could derail this growth process. Uncertainty around the outlook is high with risks tilted to the downside, it warned and said a sharp global growth slowdown in the near term would affect India through trade and financial channels. Intensifying spill-overs from the war in Ukraine can cause disruptions in the global food and energy markets, with significant impact on India.

Over the medium term, it said reduced international cooperation can further disrupt trade and increase financial markets volatility. Domestically, rising inflation can further dampen domestic demand and impact vulnerable groups. On the upside, however, successful implementation of wide-ranging reforms or greater than expected dividends from the remarkable advances in digitalisation could increase India’s medium-term growth potential.

In the light of improving growth prospects, the IMF directors was of the view that additional monetary policy tightening should be carefully calibrated. The directors also encouraged the authorities to make additional progress on the structural reform agenda. This included increasing female labour force participation, reducing youth unemployment and reducing informality remain critical to sustaining strong and inclusive growth. Strengthening regulatory framework would foster transparency and safeguard public accountability. The directors also welcomed new trade agreements and observed that additional tariff reduction would help India to integrate in global value chains and support growth.

Former Planning Commission Deputy Chairman Montek Singh Ahluwalia too emphasised that though deglobalisation is happening, India still needed to open up further and move away from protectionist tendencies. India should push further free trade agreements and make every effort to join RCEP. India has to reduce import tariffs besides improving its infrastructure and logistics to make Indian industry compete with the rest of the world. These are critical to pushing economic growth.

While noting the improvement in corporate and financial sector balance sheets, IMF Directors encouraged additional measures to counter risks stemming from tightening financial conditions. They observed that banks should be encouraged to build additional capital buffers and recognise problem loans and noted that targeted prudential tools could strengthen the banking system’s resilience to rising interest rate risks. The authorities should also make further progress in financial sector reforms.

Ahluwalia was of the view that the insolvency and bankruptcy code needed to be strictly implemented as there was some leniency during covid in view of the difficult situation. The growing NPAs in Mudra loans too needed to be addressed before it became out of control.

IMF felt that financial sector policies should continue to facilitate the exit of non-viable firms and encourage banks to build capital buffers and recognise problem loans.

IMF said the additional support to vulnerable groups this year is warranted but, with fiscal space at risk, polities should focus on a credible and clearly communicated consolidation, anchored on stronger revenue mobilisation and spending efficiency. Further improvements in public financial management, fiscal institutions and transparency would help. India’s digitalisation success can be harnessed to better target government services.

Indian economy at the moment is on a sound footing, but it cannot afford to be lax or lower its guard. IMF has warned about global recession and Indian authorities have to be prepared to meet the challenge. The employment market has nosedived. Therefore job generation has emerged as the biggest challenge in the coming financial year. (IPA Service)