External headwinds could impact growth

As far as India is concerned, there is a silver lining with Russia continuing to offer crude oil at discounted rates. The reduced prices offered last year were even matched by other countries like Iraq. The lower prices are reported to have enabled the exchequer to save as much as four billion dollars in 2022-23. But this has to be viewed in the context of the total oil import bill for the last fiscal, which is in the region of 200 billion dollars

Global headwinds could spoil the party for the Indian economy in the current fiscal even though the Finance Ministry sounds confident of macro-economic stability in its latest monthly review. It flagged the downside risk to growth due to these external factors but noted that the current account deficit had narrowed down while internal stability also showed an improvement. This was due to higher revenue, better expenditure quality and improved fiscal situation of states.

The Ministry’s monthly economic review has undoubtedly sounded a note of caution about external headwinds but is generally upbeat about the prospect of achieving 6.5 per cent growth in 2023-24. It warns about the potential impact of El Nino conditions on agricultural output but the Indian meteorological department (IMD) has made a contradictory forecast of a normal monsoon this year. It is not clear whether the IMD’s projections will be correct or whether reports of El Nino effect will actually fructify and lead to a sub-par agricultural production. But if there is low farm output, it is bound to create inflationary pressures on the economy.

The geopolitical scenario has also been highlighted in the review as a possible dampener to growth. It has to be accepted that repercussions of the continuing conflict in Ukraine cannot be avoided in the near and medium term. What continues to be worrying is there seems little prospect of the war reaching a peaceful conclusion anytime soon. The latest reports of contact between China and the Ukraine could potentially lead to some positive outcome but these are early days. The result is that there will continue to be a shortage of goods normally purchased from Ukraine, such as sunflower oil, while even Russia is reported to be finding it difficult to maintain production of a wide range of goods. The compulsion of meeting the needs of the war has meant that output of many products is falling short of requirements whether for domestic needs or for exports.

The review has talked about elevated inflation levels possibly due to lower agricultural output but the other element that is bound to affect prices are hardening trends in world oil markets. The latest move by the powerful energy cartel, the Organisation of Petroleum Exporting Countries (OPEC) along with Russia and its allies, to curtail production quotas in the first week of April led to a spurt in prices. These have moderated recently but continue to range over 80 dollars per barrel, a level still higher than comfortable for a country that imports 85 per cent of its fuel consumption. Forecasts for the rest of the year are varying with investment banks like Goldman Sachs predicting prices will touch 95 dollars by the end of 2023.

On the other hand, there is another school of thought, including experts at Citigroup who maintain that prices will soften considerably by the end of the year. This is based on the perception that recessionary trends are set to deepen in developed countries like the U.S. and Europe, leading to a dip in oil demand. Another factor impacting oil markets will be the pace of economic activity in the world’s biggest importer, China. If growth continues to pick up rapidly in that country, it could provide an impetus for pushing up prices.

As far as India is concerned, there is a silver lining with Russia continuing to offer crude oil at discounted rates. The reduced prices offered last year were even matched by other countries like Iraq, which are among the top suppliers to this country. The lower prices are reported to have enabled the exchequer to save as much as four billion dollars in 2022-23. But this has to be viewed in the context of the total oil import bill for the last fiscal, which is in the region of 200 billion dollars, according to the petroleum policy and analysis cell of the Petroleum Ministry.

The issue of global financial stability has also been mentioned in the review but it has noted that India’s banking system is considerably less prone to such developments in the near to medium term future. This assessment is correct but there are other ramifications of the collapse of big banks in the U.S. and the European Union. For instance, in the case of the California-based Silicon Valley Bank, there was considerable exposure of Indian startups, which had huge deposits in the bank. Estimates are that about 25 per cent of the start -ups in this country are banking abroad and to that extent any failure of financial institutions even in other countries can have implications here.

The other external factor that could impact growth is the expected decline in global growth from 3.4 per cent in 2022 to 2.8 per cent in 2023, according to the International Monetary Fund. This slowing trend has already led to a plateau-ing of India’s exports in 2022-23. The first blip in the export surge in the previous fiscal took place in October 2022 when a decline of 16.6 per cent was recorded. With demand expected to fall in the key markets of the U.S. and the European Union, export growth could be curtailed leading to a widening of the current account deficit.

The prospects for maintaining growth at the projected rate of 6.5 per cent in 2023-24 are thus bright but there continue to be more downside risks, as the review itself has pointed out, due to external headwinds.

It would be risky to make any definitive forecasts for the coming year since geopolitical developments are in a state of flux. But the outlook may not be as bright as projected by the Finance Ministry given the uncertainties in the external environment.