Indian Economy: Growing The Fastest Or Drastically Dooming?

  • January 30, 2023
  • Business & Economy

As per the Chief Economic Advisor of India V Anantha Nageswaran, upcoming years for India are so vibrant that we can become a $3.5 trillion economy in 2022-23. Not only this, he also added that in the next 7 years, India will become a $7 trillion economy. The Indian government aims to secure the position of being a $5 trillion economy in the next 2 years i.e. by 2025. He also said that in 2024 and 2025, the US Federal Reserve is planning to reduce its interest rates as experts are sensing the arrival of recession in the USA. If the US reduces its interest rate, it will surely give an adverse effect to Indian Rupee too.

As per World Bank, in FY23, the growth of India is estimated to be 6.9%. It is 0.6% lower than June 2022 due to the upcoming downward turn in the global economy. But the World Bank has declared India the fastest growing economy of the 7 largest developing economies. 1.7% increase in Global GDP has been forecasted by the World Bank.

NSO(National Statistics Office) has confirmed that India's growth rate has shown optimism. It has anticipated India's real growth rate to be 7% and nominal to be 15.4%.

 

India's methodical approach in FTAs

India is continuously increasing its clout in the global economy. India has canceled previous FTAs as those were creating a huge imbalance. India was benefitting less than the other country in those agreements. Now, after the decision of the Modi-government to stay out of RCEP which is now a free trade agreement among 15 members. We know that there are a lot of steps to sign trade agreements. If we see them in serial, it goes as - Framework Agreement, Early Harvest Scheme, Preferential Trade Agreement(PTA), Free Trade Agreement(FTA), Comprehensive Economic Partnership Agreement(CEPA), Comprehensive Economic Cooperation Agreement(CECA), Customs Union then Economic Union. Now, India has signed fresh FTAs with some nations for now and is keen to sign many more. India currently has different trade agreements with different countries as per India's interests. As per PIB, It has mutual CEPAs(Comprehensive Economic Partnership Agreement) with countries such as Japan, Malaysia, UAE. It has signed the Comprehensive Economic Cooperation Agreement (CECA) with Singapore. India has signed CECPA (Comprehensive Economic Cooperation and Partnership Agreement) with Mauritius. Recently, India has negotiated with Australia for ECTA (Economic Cooperation and Trade Agreement). So, we can say India has moved its path from being traditional to practical. India is signing different types of agreement with different nations which suits India's objectives and goals. Unlike previous approaches, India is now not hurrying to jump in signing FTAs. India also has SAFTA(South Asian Free Trade Area) and APTA(Asia Pacific Trade Agreement) to meet its needs.

 

India's growth visible in reports

If we look at the report 'India's fiscal outlook: FY24' by Goldman Sachs, it advises India to balance its priorities as to where to spend along with managing fiscal prudence.

If the global oil and energy supplies choose to hike, the US decides to decrease its  interest rates, government spendings are bound to increase.

 

If we see the RBI's Financial Stability Report, it has shown that the gross NPA (non-performing assets) ratio of banks has considerably decreased over the years. The gross NPA ratio which was 9.3% in 2019 has come down to 5% in 2022. This trend shows that banks have developed the capacity to handle the shocks of difficult situations in the economy. It means banks are now in a stronger position than 3 years ago.

But the fiscal deficit of the government is a concern for the economy. The FRBM(Fiscal Responsibility and Budget Management) Act, 2003 has said that the government should try to keep the fiscal deficit not more than 3% of GDP by year 2021. In the current fiscal year, the government has reached a deficit of around 6.4% or 16.61 crore Rs. in total which is very high for a good economy although lower than the projected estimate of 6.9%. For the next year 203-24, the government aims to limit the deficit to 5.9% of GDP. To comply with this target, the government is going to cut down the subsidies which will affect the larger public. If the government follows its estimated goals of deficit, it can be a good signal for the economy but with current disturbed geopolitical scenarios, it doesn't seem very easy. Also, the government plans to reduce the fiscal deficit in fiscal year 2025-26 a little more to 4.5%.

Huge tax collection

In case of tax collection also, India has collected more than expected. In the first week of January 2023, the collection to direct fax crossed the mark of Rs. 12.32 trillion. This collection is almost 20% higher than the same periods of previous year. It's a good sign for the Indian economy which shows that cases of tax evasion have come down. If we look at this figure before refunds, the gross direct tax also hiking to Rs. 14.71 trillion and that is also almost 25% more than the same period. These figures clearly depict more money in the government's pocket.

Low oil prices give no relief to common Indians

Oil prices started coming down in 2020 and oil importing nations including India started reaping the benefits of the price tussle between Russia and Saudi Arabia. Then low demand during the pandemic also pushed down the oil prices too. India with help of discounted prices offered by Russia, saved around Rs 35000 crore on crude. As per Hetal Gandhi of Crisil, India was getting just 2% of its crude from Russia previously, but in the first 6 months of fiscal year 2023, Russia's share in Indian crude has reached 16%.

Industries such as the tyre industry, synthetic textile industry, paint manufacturers and aviation sector companies recorded high profits in their balance sheets. Although, the prices of petrol and diesel didn't fall as per global market conditions. Even after the huge fall in oil prices in the international market, Indian consumers paid almost the same prices for petrol, diesel as they were paying. The reason behind that was high taxes imposed by the government. Now, the point is, if the Indian government has not extended any relief to people when oil prices are low, what will be the government's step when the international oil prices increase? ICRA has already estimated that if oil price rises $10 per barrel in the international market, the current account deficit(CAD) for India will extend $14-$15 billion which will be a huge amount. So, the government is increasing tax this time to manage its extra expenses during lockdown and cover its CAD.

 

Does falling Indian currency help India's exports or encourages price hiking?

India's forex reserves which had crossed $600 billion but now forex reserves are decreasing. The reason behind that is rupee exchange for dollars. The Rupee was rapidly deteriorating against dollars. It's been a long time since the rupee has crossed 80 against one USD. To control its fall, RBI sells some dollars in the international market and purchases Indian Rupee to hike the demand of rupee in the global market. This decreases India's forex reserves but also strengthens rupees against dollar. Falling rupee makes India's imports costlier and exports cheaper in the short term. So, it has the potential to attract imported inflation. Costly imports will also reflect in high prices of everyday goods. An Indian common man has to spend more than before due to costly imports. Imported grains and edible items will affect the pockets of Indians. For the short term, it bolsters exports but harms them in the long run. India's agricultural exports, leather industry, engineering commodities and tea sector can record more benefits in this weakening  condition of rupees for sometime which is a positive thing.

If Indian Rupee continues to fall more, RBI has one more option to decrease flow of Rupee in the market. To do this, RBI will increase the interest rates, this will increase inflation. If the interest rates increase, this will cause inflation in the market and eventually common people will end up paying more for daily essentials.

 

Repeated increase in prices of milk?

Recently, we have seen that milk selling companies like Amul have increased prices rapidly. Operational costs for milk producing companies have increased which includes increased fodder prices and input material costs. Also, the demand for milk has suddenly increased after the pandemic and companies are not able to restore their supply chains at that pace. Due to this mismatch in supply and demand, the price of milk has increased which in turn has hiked prices of ghee, butter, curd, cheese and sweets. This too has passed to Indian consumers.

Indian economy's reason to worry

As per 28th edition of 'Status Report on India's external debt 2021-22', the Ministry of Finance Has said that India's external debt is $620.7 billion in March 2022 which has increased 8.2% from March 2021. This huge figure is cause for concern for India.

Also, as per an IMF official Paolo Mauro, India's debt to GDP ratio has reached 84% approximately in 2022. This figure is a little worrisome and higher than other emerging economies. Government's point in this case is that the increase of debt is not a problem as our current focus is on increasing investments. Once investments increase and the economy gets back on track, debt will subside automatically. But whether this assumption goes right or not, will be clear after some time.

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