Millennium Post
Editorial

Preparing for the worst

Preparing for the worst
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Last week, in its July update to the biennial World Economic Outlook, the International Monetary Fund slashed India's GDP forecast for FY 2022 by 80 basis points to 7.4 per cent. The GDP growth rate is further expected to slide down to 6.1 per cent in the next fiscal. While the downward projection is an expected result under present circumstances, and India's growth rate is still faring well when compared globally, the trajectory of GDP growth rate should still worry us for several reasons. First of all, it will be prudent to examine the current state of India's GDP growth rate, and also what factors have led to the downgrade in its projection. It is true that the IMF's growth projection for India in the current and upcoming fiscal is still better than many prominent economies across the globe. This better standing, however, is accompanied by: 1) higher vulnerability to stagflation; and 2) ever-increasing wealth and income inequality. Essentially, as India appears to recover from the pandemic-triggered economic crisis, some sectors are growing fast while most of those continue to reel under the crisis. Also, a minuscule proportion of people are making exorbitant money while there is still no respite for the larger lot. It can safely be said that India's thus far comfortable recovery makes sense, but not much. Coming to the factors triggering the downward projection, the IMF has itself cited less favourable external conditions and rapid policy tightening by the Reserve Bank of India to be major reasons. While there is little to do about external factors, the tightening of the monetary policy is a chosen path. Since the Reserve Bank of India shed its growth-focused accommodative stance post the release of the April edition of World Economic Outlook, a cut in growth projection was almost an obvious outcome. Furthermore, the spillover effects of the appreciation of dollar against other currencies is being termed as a reason behind slowed growth in global trade. Given that the Indian Rupee is also seeing its worst valuation against the dollar, it appears to be an obvious contributing factor behind the country's slowed growth rate. As per WEO's July update, the dollar has appreciated by five per cent this year in nominal effective terms, as of June. It is reassuring that the government and the RBI are taking bold measures in sync to tame inflation — aware of the fact that these measures may lead up to slow growth and higher unemployment in the short run. The RBI has thus far raised policy rates by 90 basis points over the past couple of months and is expected to make further hikes in its upcoming monetary policy review meeting on August 5. This may further slow down growth. If one talks crudely in terms of numbers and percentages, India's growth projections — even after the IMF slashing — represent a cozier picture than what it is in reality. India's current growth outlook may be misleading as it is measured on a low base rate. The Indian economy took a deep hit during the pandemic, more than many other countries with whose GDP we tend to compare ourselves. The growth projection of 7.4 per cent measures an improvement over FY 2021 — a year when the country was badly caught in the grip of the pandemic. As the economy will stabilize post the pandemic, growth projections will keep coming down. An absolute measure of GDP might be a more meaningful exercise. It may also be noted that India's revised growth projections by various rating agencies for the current fiscal range from 4.7 per cent (Nomura) to 7.8 per cent (Fitch). Therefore, any complacency or undue self-praise might not be good from a policy perspective. The IMF's July update of World Economic Outlook stated that though the risk of recession is ruled out in 2022, it "is particularly prominent in 2023, when in several economies growth is expected to bottom out". At present, the global geo-political and economic situation is highly unstable. Hence, preparing for the worst, we must use the buffer period to strengthen the foundations of our economy.

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