If recent projections of several international organisations are any indication, global economic activity continues to be well below the pre-pandemic level and is likely to drop further in 2024. The International Monetary Fund and the Organisation for Economic Co-operation and Development indicated in their recent assessments that while the global economy is more resilient than predicted earlier in the year, the growth outlook is distinctly weaker, with the only shining spot being the relatively low level of inflation.
However, the ongoing conflict between Israel and Hamas could alter these predictions, especially if the global community is unable to de-escalate the current situation in West Asia relatively quickly. A prolonged conflict would open up the faultlines between Israel and the major players in the Arab world by reversing the entente that has been evident of late. This would surely ring alarm bells for an already faltering global economy.
From an Indian perspective, the unfortunate developments in West Asia and their resultant impact on the global economy could not be more ill-timed. Even before the cyclical economic downturn or the adverse impact of the Israel-Hamas conflict begins to bite, India’s links with global trade and finance have already become somewhat tenuous. Export growth has slowed perceptibly while inflows of foreign direct investment (FDI) are now well below the highs reached during 2020-22.
In 2022-23, the annual merchandise export growth declined sharply to below 7 percent and this was after exports had grown at a historically high rate of nearly 45 percent just a year earlier to breach the $400-billion mark for the first time. The slowdown in exports led to India’s highest ever merchandise trade deficit of $263 billion. However, in the current financial year, exports consistently declined through the first five months for which data are currently available. During the first six months of this year, exports declined by 7 percent as opposed to a nearly 13 percent expansion during the corresponding period in 2022.
On the other hand, imports also shrunk 12.5 percent between April and September this year over the previous year’s level, resulting in a 21 percent reduction in the trade balance. A slowdown in imports is usually not a happy augury for an economy like India’s, whose manufacturing sector is import-intensive. With the manufacturing sector also registering lower growth in the first five months of the current fiscal, the import numbers will need to be closely monitored.
The decline in exports during April to August has adversely affected most of the economy’s major sectors. Of the top 10 broad sectoral groups among the principal commodities which account for over 87 percent of the total exports by value, eight sectoral groups shrank during the first five months of this fiscal as compared to the corresponding period last fiscal. The two exceptions were electronics and industrial machinery groups. The former group has shown strong export performance in recent years, with the value of exports more than doubling over three years. Consequently, its share in total exports has expanded from 3 percent in 2021-22 to over 4 percent in 2022-23 and further to over 6 percent during April-July 2023. The electronics sector has witnessed a significant slowdown in its export growth by over 15 percent during the first five months of the current fiscal.
Falling exports have also slowed India’s penetration into almost all major markets except the UK. The US, India’s top export destination for the past several years, saw a double-digit drop in imports from India during April-August this year, coming on the back of an insignificant growth during 2022-23. This slowdown in export growth to the world’s largest economy does not augur well for the future of Indian businesses as it came during a phase when the US economy seemed far more resilient than most major economies. But with the prospect of its sharp deceleration in the months ahead, India’s export prospects also look quite dim.
Services trade has historically served as the shock absorber, preventing serious deterioration of the current account deficit even as the merchandise trade deficit has worsened. Last fiscal, even when the merchandise trade deficit expanded by over 40 percent, the ratio of the current account deficit to the gross domestic product did not deteriorate beyond 2 percent. However, in the first five months of the current fiscal, the slowing global economy seemed to dampen India’s services exports as well. In this phase, services exports expanded by less than 6 percent as against the 40 percent growth it registered during the corresponding period in the previous fiscal.
Global FDI inflows have not recovered from the impact of the pandemic, and in 2022 they were below the level seen in 2010. While inflows have been affected, it also needs to be pointed out that during the pandemic when inflows sharply declined, India received its highest ever inflows. But in 2022-23, India’s gross inflows declined by over 16 percent and net inflows by foreign companies decreased by over a quarter. The situation is worse in the current fiscal: between April and July, gross inflows dipped by a quarter as compared to the corresponding period in 2022, and worse still, disinvestments are almost 50 percent higher. Consequently, net investments were 58 percent lower. These numbers do not augur well for an economy that needs to strengthen its manufacturing base to play a meaningful role in the global economy.
In an election year, it is difficult for the government to dwell on the weaknesses of the economy. But faced with increasing volatility both on the domestic and international fronts, the government will do well to focus on the present weaknesses and take immediate remedial steps lest the impending global uncertainties start biting.
Biswajit Dhar
Former professor, Jawaharlal Nehru University and Vice President, Council for Social Development
(bisjit@gmail.com)