The political instability in a large and industrialized state like Maharashtra is not helping. Instability means inaction or even paralysis in decision making, since policy makers are distracted in tackling the political situation
Germany is the current chair of the group of seven richest nations called G7. This group is meeting in the Bavarian Alps, hosted by the Chancellor of Germany, Olaf Scholz, who took charge just six months ago after Angela Merkel’s tenure of 16 years. India is an invitee to the meeting along with Indonesia, Argentina, Senegal and South Africa.
Even though the agenda for the meeting covers many topics like food security, health, climate change, terrorism, gender equality and even democracy, clearly the most important worry on everyone’s minds will be the war in Ukraine and its impact on the world economy. Prime Minister Narendra Modi, who is attending, tweeted that he looks forward to interacting with world leaders, but he too would like to gauge the international mood on the economy.
India is very vulnerable being dependent on import of energy, mainly crude oil. Oil prices have remained stubbornly high, and are not likely to come down. India wants to take advantage of a steep discount being offered by Russia on its oil exports. In doing so it will earn the ire of all the members of G7, who want a complete boycott of Russia, in order to put economic pressure on the country to withdraw from Ukraine.
Energy and Russia
But Germany, and other west European nations are learning the hard way how much energy dependence they have on Russia, whose oil export and particularly gas pipelines have become Europe’s lifeline. Switching to coal-based energy is not easy and nor desirable. In this awkward geopolitical position, some people are questioning the wisdom of erstwhile, and much venerated leader Angela Merkel, during whose long tenure, Germany’s energy embrace with Russia became tighter.
Now Germany has started to ration the supply of gas causing much hardship. Apart from energy, even food prices are at a record high, because of the Ukraine conflict. The inflation is also affecting other consumer items and producer inputs. One additional reason for persistent inflation is due to shortages created by lockdowns in China. During the recent and new outbreak of Covid, possibly a fourth or fifth wave, China adopted a zero-Covid policy, imposing very harsh lockdowns even in big cities like Shanghai. This has caused the ports in China to be clogged by ships bound for the West await their consignments.
As a consequence, inflation and shortages in Western economies are being blamed on Russia and China for separate reasons. And of course, both President Vladimir Putin and Xi Jinping are not invited to the G7 summit. The G7 summit is also determined to show a unified front of all democracies to counter the actions and stance of Russia and China. But putting up this show of unification is not easy.
Russian oil for India
For instance, India wants to have the freedom to import cheaper oil from Russia and will simply not join any call for boycott or blockade. After all Russia has always been a very dependable ally in the supply of military hardware, technology and support for several decades. Similarly, India has been conducting several rounds of high-level talks with China (15 and counting) to sort out border disputes, after the bloodshed and deaths in Galwan, Ladakh. Imports from China into India continue to soar, and for the third year in a row, Indo-China trade will grow strongly.
Meanwhile, the global economic outlook continues to become gloomier. The World Bank recently reduced its global growth forecast for this year, from 4.1 to 2.9 percent. That is a downgrade of 1.2 percentage points, which translates to a lower income of trillions of dollars. Both the U.S. and Europe are expected to go into recession, i.e. decline in GDP for two consecutive quarters.
India’s growth forecast too has been reduced by 1 or 2 percent by many economists. That translates into reduced national income of about 3 to 4 lakh crores, and perhaps 5 to 8 million fewer jobs. India is counting on a vigorous growth in exports for next year too, to reach closer to $500 billion in merchandise exports. But that would need the world economy to be in better shape than what seems to be the case.
Since most economies are facing very high inflation (46-year high in the U.S., 30-year high in India for wholesale price index inflation, record high in U.K.), most central banks are increasing the interest rates and tightening money supply. This tightening is causing investors, especially those in stock markets, or private equity funding future unicorns and startups, or hedge funds, to become risk averse.
Foreign portfolio investors have pulled $40 billion out of India in the past six months. No wonder the stock market has crashed. The much-celebrated initial public offering of the Life Insurance Corporation has seen its stock price come down and value erosion of nearly 1.2 lakh crore rupees. Much of this is because of foreign and global investor sentiment.
Even the domestic retail investors in India, whose systematic investment plans (SIP) used to pour 10-20,000 crores into the stock market every month, are now reducing their participation.
The world is heading to stagflation, and India will not remain immune from the effect. It must pull itself up on the strength of domestic demand and fiscal support. Money supply is getting tightened for now but can provide some relief if inflation eases. A good monsoon is badly needed. As of now the June rainfall is barely one fourth of the long-term average, i.e., normal monsoon.
To add to all this, the political instability in a large, industrialized State like Maharashtra is not helping. Instability means inaction or even paralysis in decision making, since policy makers are distracted in tackling the political situation. Private sector investors in new factories, new businesses, in housing and other consumer industries might also prefer to wait and watch. All this adds to the sluggish growth environment.
However, compared to the Western economies which are entering a recession, India will have some positive growth, but perhaps not as high as needed. That is of course small comfort for a developing economy, for job creation and growth which is imperative. Policy makers have a tough time ahead in the next six to 12 months.
(The writer is a noted economist. Views are personal. By special arrangement with The Billion Press)