Cycle of Confidence

WHEN FINANCE MINISTER Nirmala Sitharaman rose in Rajya Sabha on December 6 at the end of a three-day debate on the economic situ­ation in the country, she had every reason to be confident. As she trotted one statistic after another, the message was clear: India had left behind the scars of the past years inflicted by war and pestilence.

In the second quarter of fiscal 2022-23, India’s real GDP growth clocked an impressive 7.6 per cent, the highest for any economy in the world. The number, Sitharaman went on to explain, ought to be looked at in the global context: While India was pacing ahead, the world’s third and fourth largest economies—Germany and Japan—contracted by 0.4 per cent and 2.1 per cent, respectively.

In a world that is being battered by economic headwinds, macroeconomic stability matters. Seen from that vantage, India has not only done well but has even managed to continue pacing ahead. While many countries in the West are buffeted by the cost of living crisis, India has managed to keep a check on inflationary pressures through a combination of fiscal and monetary means. While the secret sauce of this success lies in deft political and ad­ministrative measures, the results are for everyone to see.

In the October edition of the International Monetary Fund’s (IMF’s) World Economic Outlook (WEO), aptly titled ‘Navigating Global Divergences’, India stood out in terms of its rapid growth and the WEO noted, “Growth in India is projected to remain strong, at 6.3% in both 2023 and 2024, with an upward revision of 0.2 percentage point for 2023, reflecting stronger-than-expected consumption during April-June.” The latest edition of the RBI’s Survey of Professional Forecasters (SPF), released earlier this month, had a similar message: The median forecast for growth in 2023-24 was 6.4 per cent, up by 0.2 percentage points while that for 2024-25 remained unchanged at 6.3 per cent.

The key to macroeconomic stability lies in close coordina­tion between fiscal and monetary authorities. This was in ample display during the crisis years, beginning in 2020. In 2019, India’s average annual inflation was a benign 3.73 per cent, within the 2 per cent to 6 per cent band of comfort for RBI. Then, suddenly, in 2020 average inflation jumped to 6.62 per cent. In 2021, this fell to 5.13 per cent and rose further to 6.7 per cent in 2022. In these years, the wild swings in aggregate demand and supply made the task of keeping growth-inflation dynamics on a steady path rather dif­ficult. Coordinated efforts to ensure stability began to show results by the third quarter of 2022. If one compares the inflation print for 2022, only two months (November and December) had inflation rates below the upper level of RBI’s tolerance level (6 per cent). In 2023, in contrast, inflation was below the upper tolerance band for seven of the 11 months for which inflation has been reported. (The figures for December will be reported in January.) To be fair, a better measure is the median of the tolerance band (4 per cent) but given the extraordinary circumstances of the past years, it is the limits that matter.

Much of this had to do with RBI’s steely resolve to keep infla­tionary pressures under check and the ability of the government to take the right steps. In her speech in Rajya Sabha, Sitharaman said that the food and consumer affairs ministry had been releas­ing onions, pulses, and other commodities from buffers as and when required. At the same time, onions and tomatoes are pro­cured when necessary. Furthermore, stock limits on pulses and wheat have been imposed to keep prices under check. Sitharaman also mentioned that trade policy had been changed so that ample buffers of key items are available domestically. Import restrictions and quotas have also been introduced on specific commodities.

These economic developments in 2023 should be understood against the backdrop of two very different environmental factors, one domes­tic to India and the other external. Both have been handled well by the present government.

Domestically, India is now in elec­tion mode. The standard response of governments—from a political busi­ness cycle perspective—is for them to consolidate economic gains over four years of their tenure and then open the spending taps in the fifth year in the hope of prevailing at the hustings.

The fact that India grew at 7.2 per cent in 2022-23 in the midst of demanding situations shows the resilience of its economy. This was not a flash in the pan

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Over the past 20-odd years, this has changed into con­tinuous spending over the entire political cycle. The Modi government is not immune from this, and it has to respond, given that such spending is now almost an environmental vari­able and not a mere political one. But something has changed as well. For one, the leakages from this kind of spending have been arrested to a great extent by direct transfer of benefits to individuals (DBT) instead of their being spread over a thick parasitical layer of intermediaries. What this did was make the ‘welfare schemes’ of governments more or less ineffective. Sitharaman said as much in her speech when she said these were “naam ke vaaste” or “just on paper” schemes. She buttressed her point by comparing the welfare schemes of the Modi government with those that were launched by earlier governments.

Beyond the political point scoring, however, lies a different reality: spending on ‘populist’ measures is up, but at the same time public investment has not suffered in the bargain. Is this the kind of ‘virtuous cycle’ that has eluded many governments before the present one? It is a bit early to say that with confidence but some signs can be discerned. For one, the government has found enough money to launch Production Linked Incentive (PLI) schemes in various sectors. These range from mobile phones to automobiles and from pharmaceuticals to drones. In between lie some 14 key sectors where these schemes have been launched. The ultimate aim is to create an industrial ecosystem, a goal that has eluded India for long. Some early signs are visible. Apple is ramping up its production in India even as it is trying to forge a supplier network for a range of inputs for its products in India. This is the kind of ecosystem that it created in China that made that country an in­dustrial and export powerhouse.

This is linked to the second environmental factor—the exter­nal one—that India has navigated skilfully in 2023. The world is increasingly being fragmented along geoeconomic blocs. This is a situation where the global economy is aligning along existing geopolitical blocs. On one side are the US and its allies and on the other side are China, Russia and their partners. The economic conse­quences of this were spelled out recently by Gita Gopinath, the first deputy managing director of IMF. What is germane from an Indian perspective is her observation that, so far, “non-aligned” countries have been successful in managing these headwinds and making the most of this situation.

In her plenary speech to the 20th World Congress of the Interna­tional Economic Association, Colombia, on December 11, she said, “But a lot will depend on how exactly trade and investment fracture. If some economies remain non-aligned and continue engaging with all partners, they could benefit from the diversion of trade and investment. Our simulations suggest that if only trade between a US-Europe bloc and a China-Russia bloc is disrupted, the remain­ing economies will see some gains, on average.” As a leader at a key international economic institution, her remarks were, of course, about the dangers to the global economy from such fragmentation.

Nothing illustrates this better than India’s buying of crude oil from sanctions-hit Russia at a discount and now its exploration of such options from Venezuela. The exact economic gains from such discounted oil are yet to be evaluated but it has undoubtedly helped keep domestic fuel prices in check. In the case of crude oil prices and imports, the equation is straightforward: the higher the global price of imported crude oil, the greater the domestic retail price. If the domestic retail price is not increased commensurately with the import price, the current account deficit (CAD) swells. During some of the most difficult times in the past two years from this perspective, India has managed to successfully navigate the pricing quagmire.

This has not gone down well with some Western countries and their publics. But at the same time, India has managed to get some of the ‘friend-shoring’ pie from Western countries in terms of shift­ing of supply chains from China. While far from making the most of this developing situation, India is reaping some of these ben­efits. In this, too, the present government has successfully waded through a complex global economic situation.

The year that is ending was shaped in complex ways by these two domestic and external situations. The fact that India grew at 7.2 per cent in 2022-23 in the midst of these demanding situations shows the resilience of its economy. That this was not a flash in the pan was confirmed by continuing growth in the first and sec­ond quarter of 2023-24 when the economy paced ahead at 7.8 per cent and 7.6 per cent, respectively. The annual growth for 2023- 24 is expected to be 6.3 per cent. These are happy numbers in an economically unhappy world.

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Siddharth Singh

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