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Context

• The World Bank has slashed India's GDP forecast for fiscal year 2022-23 to 8% from 8.7% predicted earlier.

 

World Bank Forecasts

• According to World Bank household consumption will be constrained by the incomplete recovery of the labour market from Covid-19 and inflationary pressures.
• High oil and food prices caused by the war in Ukraine will have a strong negative impact on peoples’ real incomes.
• Thus, worsening supply bottlenecks and rising inflation risks would be caused by Russia's invasion of Ukraine.
• The World Bank said the increase in energy and food prices would hit poor households the hardest, exacerbating the already rising inequalities.
• Credit offtake in infrastructure is expected to continue growing in 2022.
• The travel services balance may improve as India allows international flights to resume.
• Exports of computer and professional services are expected to remain strong.

 

Asian Development Bank Forecasts

• Asian Development Bank Outlook 2022 had said that India's growth in the next fiscal year 2023-24 will accelerate further to 8%, though China will witness a deceleration in growth to 4.8% in 2023.
• According to ADB India is likely to maintain its position as the fastest-growing major economy with a growth rate of 7.5% for 2022-23 on strong investment prospects against 5 per cent for China in January-December 2022.

Ongoing and plausible future impact of Ukraine-Russia war on India and its Economy

• Inflation (already ruling at high levels) with rise in fuel and food prices
• Other prices will also rise as supply bottlenecks get aggravated due to sanctions and the war situation.
• The investment climate will deteriorate due to the uncertainty.
• Capital flows into the country will decline leading to a further decline in the stock markets.
• The price-to-earnings ratio (P/E ratio) was already ruling at high levels and such a big shock was bound to hit stock prices.

 

The price-earnings ratio, also known as P/E ratio, is the ratio of a company's share price to the company's earnings per share.

 

• Demand for gold is likely to increase leading to its increased import. This along with the high bill for petro goods will mean that the imports bill will rise.
• Exports are likely to be hit due to the decline in growth in the world economy and de-globalization.
• With capital flows declining the Balance of Payment which was already turning adverse will deteriorate further. Consequently the rupee will weaken compared to the dollar which will aggravate inflation further.
• All these factors, uncertainty, demand, investment, inflation and BOP, will reduce the rate of growth of the economy which was badly hit by the pandemic.
• Due to inflation the Budgetary targets may be met, but this would not be so in real terms after adjusting for inflation.
• Expenditures will increase while real revenues will be hit due to slow down and other difficulties.
• The already high fiscal deficit will increase further and in such circumstances, it is the social sector and capital account expenditures that are curtailed. The support to the poor then declines.
• India depends on imports for critical defence equipment. It will face difficulty in procuring defence equipment already contracted since both the rich countries and the Russians will delay deliveries, given their own requirements. This will mean India’s preparation to face China and Pakistan will weaken.

 

Dealing with the consequences of the Russia-Ukraine War

• In the longer run, India will have to restructure its international relations in the new Cold War scenario and especially given the relations with China. In the last two years while facing the Chinese incursions we only got lip service from the Western powers and silence from Russia.
• With de-globalization impacting growth in the world, trade, capital and technology flows, India will have to strengthen its economy on its own. The public sector will have to play an important role since the private sector will not be able to boost itself on its own when demand is short.
• The country will have to strengthen its R&D which will require putting its education sector in order.
• Social sectors will have to receive a much higher priority so that the productivity of workers rises and their degrading living conditions improve. That will not only provide the market for growth of Indian economy but strengthen the country.

 

Bringing the economy back in track

• In this fragile and uneven period of global recovery, there is a need for better targeted and coordinated policy and financial measures at the national and international levels.
• The time is now to close the inequality gaps within and among countries.
• India must focus its resources on capital investment, for example, on physical infrastructure, skill-building, and improving public health and other social infrastructure.
• These expenses should be financed through sustained efforts toward monetization of assets and attracting investments.
• The other area of focus must be enabling the ecosystem around job, income, and demand creation. India is a domestic demand–driven economy and needs demand to sustainably pick up for a strong recovery.
• Monetize the land owned by public sector companies which could be used to develop eco-systems to nurture start-ups and develop sites for industrial clusters.
• Government should refrain from frequent policy twisting as it deters investment due to policy uncertainty.
• MSMEs should be included in the industrial clusters and given more Government support such as market facilitation, technology support, simplification of compliance norms etc.
• Since MSMEs are India’s largest job creators, the government will have to identify their pain areas, and devise a solution that helps them become a part of “Aatmanirbhar Bharat.”
• Government must focus on short- as well as long-term measures to boost exports and encourage foreign direct investment in sectors where India has a competitive advantage.
• By adopting Industry 4.0 and automation technologies and investing in analytics, re-skilling, and up-skilling, Indian manufacturers could accelerate.
• Eliminate exemptions on countervailing duties on imports as the duty exemptions are favoring foreign producers over domestically made goods
• To promote exports boost spending on research and development to at least 2% of the GDP.
• We need to recognize that our strength lies in labor, cost and productivity skills so we need to make mega industrial clusters preferably near its ports, which leverage on laborintensive sectors.
• We must aggressively work on policy matters related to logistics costs, loading-unloading time, moving stock by road or rail
• India needs to conclude Free Trade Agreements with the European Union and US that will help in the long run in promoting market access and huge opportunities. In the present time, trade blocs are more popular than multilateral policies under the WTO.

 

https://www.livemint.com/economy/world-bank-cuts-india-s-gdp-growth-forecast-to-8-from-8-7-in-fy23-11649851787363.html