World economy in pain, but India has some balm

The world economy is hurting. The side effects of the economic policy response to the Covid pandemic have led to massive inflationary pressures, particularly in the advanced economies where the level of inflation is higher than at any point in the last forty years. The direct effect of the Russia-Ukraine has added to that inflationary pressure, particularly with soaring energy prices. The economic policy response to this bout of inflation, in the form of higher interest rates, is depressing the prospect of growth – already under threat because of massive disruptions. That China, previously the engine of growth for the world economy and also the factory of the world is pursuing a Zero Covid policy relentlessly is adding to the slowdown. Can India buck the global trend?

The fact is that India is not immune from global developments. The RBI has had to respond to interest rate hikes in the US by hiking interest rates in India in order to prevent a destabilizing flight of capital out of India to the US. That will inevitably affect growth as consumers and investors have to pay more for loans. The persistently high global oil prices, unlikely to abate until a resolution of the Russia-Ukraine war, put pressure on inflation and on the Government’s fiscal position. That said, the Indian economy’s fundamentals are stronger than some of the advanced countries. India’s economic policy response to the pandemic was more conservative than in advanced economies. While support was given to the poor and MSME’s, there wasn’t a running tap of cheap liquidity being pumped into the market. Therefore, India has not suffered the side effects the advanced economies have. To the extent that inflation is high (though lower than in the US and UK), it is because of supply disruptions and high oil prices.

Unfortunately, it still does not leave much room for the Government to use fiscal and monetary levers to boost growth. Monetary policy is moving in sync with the US Federal Reserve and tightening. High oil prices have meant that the Government’s tax collections from this sector – a major source of tax revenues -- are lower than in the pandemic or prior to that. There is hardly any room for fiscal stimulus given the already large number of schemes and programmes the Government is committed to fund.

Fortunately, India has an additional lever of economic policy, namely structural reforms, which can yield significant additional growth. Privatisation has not really taken off despite the sale of Air India, probably the toughest PSU to divest. It must be fast tracked. State electricity Discoms are still in a state of financial distress and are a constraint on the growth of the economy. These must be cleaned up. While there has been considerable improvement in the Ease of Doing Business, India is still far behind the advanced economies and its competitors in East Asia. Now is the time to remove all red tape decisively. The GST can also be made more efficient by moving to a single rate.

There are plenty of options for the Government to lend a helping hand to slowing growth. Hopefully, it will act swiftly.