India’s prospects amid global headwinds: Promising figures, uncertain future

Recently, the S&P 500’s Purchasing Managers Index (PMI) hit a 31-month high for India, demonstrating a revival in demand. Based on the Ministry of Commerce’s April 2023 figures, India’s overall trade deficit has fallen to $1.38 billion from $8.37 billion in April 2022. The news of India’s GDP figures brought much hope of a strong economic revival. At 7.2 per cent growth, the figures came as a surprise. With an impressive 6.1 per cent growth in Q4, the Indian economic machine seems to be alive and functioning well.

However, with recessionary fears looming in the US and Europe, deflation on the cards in China and slow growth in the UK, India’s growth story might see turbulence due to depressing external demand. Let’s make a quick survey of emerging trends.

In the past couple of months, financial news out of the US has been a mixed bag. The collapse of three banks, tightening regulations to avoid a system-wide contagion, lay-offs in the tech space have contributed to recessionary fears. However, 339,000 new jobs in May suggested economic resilience.

In the past one year, there has been a 3.2 per cent increase in trade between India and the US. Important items of trade such as Mineral Fuels, Oils, Chemicals and Pharmaceuticals report consistent growth. Experts are divided on the recession question, with many claiming it to be an eventuality due to an inverted yield curve, and others expecting a recession-free 2023 due to strong consumer sentiment in the US.

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The resolution of the US debt ceiling saga has prompted Goldman Sachs economists to suggest a 25 per cent chance of seeing a recession in the next 12 months. However, international demand from American consumers may suffer if the US Federal Reserve shifts its focus to full-time inflation control. The moderate view on the American economy holds the “K-shaped” recovery to be in full swing. As large American retailers like Target and Dollar Store General report sluggish growth, housing and employment figures come in strong.

Between April 2022 and April 2023, India’s total exports to the European Union (EU) have grown 6.8 per cent. However, all is not well with the Eurozone. In the backdrop of the Russian aggression in Ukraine, increased energy expenses and falling growth across the 20 nation-block, the recent news of the EU entering a phase of technical recession has raised an alarm for many experts. Household spending in Europe had fallen 1 per cent in the previous quarter and 0.3 per cent in the first three months of 2023.

In a bid to control inflation, the European Central Bank (ECB) has raised interest rates. It maintains that there is more to come, given the persistence of core inflation in food and energy. Inflation had reached an all-time high of 10.6 per cent in October 2022 and has fallen to 7.0 per cent in April 2023. To meet the 2 per cent inflation-target the ECB has set for itself, much needs to be done.

European policy pundits would be advised to consider improving trade accessibility measures with India as a means of reducing the costs associated with imports -- monetary policy and trade policy are both essential in combating a cost-of-living crisis.

The UK presents an interesting set of speculations. A recent PwC report suggests that the UK may miss a recession in 2023. However, the report draws concern to the low labour productivity in the UK as compared to other G7 nations. With growth pegged around 1 per cent in 2023 to 1.6 per cent by 2025, broader concerns regarding consumption persist. Inflation is said to return to an expected 2 per cent by 2024. The IMF has echoed this sentiment and expects the UK to miss a recession in 2023. However, it warns of a long-term illness, due to record high unemployment.

Future projections may diverge as, in congruence with low growth affecting the UK, a recent KPMG report suggests half of the consumers in the UK have cut back on non-essential spending. The report also says that 30 per cent of the consumers are expected to dip into savings to cope.

With petroleum products emerging as the top segment of export from India to the UK, and as negotiations over the India-UK Free Trade Agreement drag on over investor protection concerns, energy security questions remain for the UK.

India’s exports to China grew at 3.03 per cent between April 2022 and April 2023. Meanwhile, imports from China to India fell 5.57 per cent in the same period. The trade deficit stands at $83.2 billion. Increased inflation in the US and Europe, and the subsequent interest rate-tightening has resulted in manufacturing woes in China. Deflationary concerns are arising with a consistent 8-month decline in the Producer Price Index (PPI) as per the Chinese government’s National Bureau of Statistics.

This is a concern for Indian exports, which revolve around iron ore, aluminium and petroleum. The prevailing macro-economic conditions present an opportunity for India and China to cooperate as capital and intermediate goods represent a large segment of bilateral trade.

According to some experts, after years of credit-fuelled growth, a weak growth momentum might be on the cards in China. Recently, the biggest State-run banks in China have cut interest rates to spur consumer demand. This move signifies slow consumption-led growth after a multitude of lockdowns through most of 2022. Although Beijing estimates a 5 per cent growth in 2023, job creation and employment continue to remain outstanding challenges for the Chinese economy.

In this international environment, India’s growth figures are a notable outlier to the general air of economic malady. As much as New Delhi has the right to smile on improving economic fundamentals, it must remember that the fate of India’s economy is linked with that of the world. For now, New Delhi will have to hope for the best in the international markets while dealing with a falling Private Final Consumption Expenditure internally, with the hopes of spurring a ‘crowding-in’ effect to make growth figures sustainable.

(The writer is pursuing a Master’s degree in Economics, following a Master’s in International Relations, at Manipal University)