Retaining the crown of ‘fastest-growing economy’
India faces volatility in the availability and consequent pricing of global food supplies. This volatility can directly impact domestic inflation.
India maintains its position as the world’s fastest-growing major economy, with a growth rate of 6.1% in the fourth quarter of FY 2022–23. Price data published on June 14, 2023, reveals that the Consumer Price Index (CPI) inflation has decreased to its lowest level in two years, standing at 4.25% in May 2023. Additionally, among emerging market economy currencies, the Indian rupee has exhibited the highest stability. While these accomplishments demonstrate positive macroeconomic indicators for India, it is important to remain cautious and attentive to potential challenges, risks and opportunities that may arise.
One of the significant challenges India faces is volatility in the availability and consequent pricing of global food supplies. This volatility can directly impact domestic inflation, particularly if transportation and energy costs remain high. The World Trade Organization (WTO) has attested to these concerns in its Global Trade Outlook report, which indicates a 44% year-on-year increase in the average price of wheat during the first 10 months of 2022. Interestingly, the value of traded wheat only rose by 31%, suggesting a decline in the volume of global wheat trade by 7.5%. Although global prices of grains, vegetable oil and dairy products have started to decrease, the increase in sugar, meat, and poultry prices might counterbalance these reductions. India will need to develop self-sufficiency vis-à-vis its foodgrains, requiring attention to agricultural productivity.
A second concern is the sticky core inflation in most developed economies, making central bank monetary policy intervention inevitable. Thus, core inflation—the metric which excludes volatile items such as food and fuels—has remained high in developed economies, even while headline consumer price inflation has reduced due to declining food and energy prices.
Take, for example, the United States inflation figures. According to OECD statistics, while headline inflation in the US dropped from 9.1% in June 2022 to 4% in May 2023, core inflation fell only marginally from 6.6% in September 2022 to 5.3% in May 2023. Similarly, in the European Union, headline inflation dropped from 11.5% in October 2022 to 6.1% in May 2023, while core inflation continued to rise, reaching 6.6% in March 2023 before it came down marginally to 6.13% in May 2023. Such sticky inflation would mean that the era of high-interest rates may continue, with its attendant consequences impacting emerging market economy currencies, including the Indian rupee.
Another significant challenge for India is the limited potential for export-led growth. Factors such as rising geopolitical tensions, global food insecurity, potential consequences of monetary tightening, risks to financial stability, and increasing debt levels contribute to the challenge of limited scope for merchandise trade volume growth. The WTO predicts that the merchandise trade volume will grow only by 1.7% in 2023, compared to a 2.7% growth in 2022 and a substantial 9.4% growth in 2021. As such, India cannot rely on exports—which accounted for a meagre 21.5% of GDP in 2021-22—as a driving force for growth.
A noteworthy development in India’s economic landscape relates to its crude oil imports and constitutes a potential opportunity for India to reduce its expenditure on oil significantly. Beginning from June 8, 2023, the Brent crude oil price benchmark—widely recognised as the most important global benchmark—has started incorporating crude oil prices from the US, specifically the West Texas Intermediate Midland crude. Including this cheaper US crude oil in the calculation of Brent prices is expected to lower the average crude prices globally.
This development is particularly beneficial for India, which is a net oil importer and might benefit from the reduced costs of imported oil. The potential cost savings from including US crude oil in the Brent benchmark can have positive implications for India’s trade balance, current account, and overall macroeconomic stability. This development presents an opportunity for India to reduce its oil spending and allocate resources to other developmental and investment priorities, which it must not squander away through inefficient oil use.
Another significant area in financial markets and institutions is the transition from the London Interbank Offer Rate (LIBOR) to alternative reference rates, which holds significant implications for India. LIBOR, which has been in use for over 50 years, has served as a widely used benchmark for pricing various financial instruments, including loans, derivatives and bonds. With the UK’s Financial Conduct Authority (FCA) mandating the discontinuation of LIBOR as of July 1, 2023, market participants will no longer be able to rely on LIBOR for pricing their financial products. This means regulators, banks and financial institutions will be crucial in educating market participants about the transition from LIBOR and raising awareness about alternative reference rates that will replace it. This involves disseminating information, conducting workshops, and providing guidance to ensure a smooth and orderly transition.
The transition from LIBOR also requires adjustments to be made in financial contracts and agreements that currently rely on LIBOR as a benchmark, including renegotiating contracts, updating documentation, and incorporating the use of alternative reference rates, such as the Secured Overnight Financing Rate (SOFR) or the Indian Overnight Rate. These changes must be implemented effectively to ensure contractual continuity and mitigate any potential disruptions in the financial system. Additionally, financial institutions will need to assess the impact of the transition on their balance sheets, risk management frameworks and business models. It may also involve addressing potential valuation and accounting implications arising from the transition.
Achieving the fastest-growing economy tag has been an accomplishment. Maintaining it will require agility in tapping the opportunities and deftly tackling the challenges the external environment poses.
Professor, Finance & Economics, and Executive Director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR
(Views are personal)