Inflationary pressures hit economic recovery

India put Covid-19 behind it through the world’s largest vaccination programme but restoring economic growth to pre-pandemic levels is proving to be a daunting task.

India’s was the fastest growing large economy in the word when Narendra Modi led the Bharatiya Janata Party to power in 2014.

Hiccoughs caused by two early decisions of the Modi regime, replacement of high value currency notes and introduction of goods and services tax, slowed down the economy. The fault lay not so much in the decisions as the manner in which they were implemented. Both measures were implemented without adequate preparatory work.

The nationwide lockdown, imposed on just four hours’ notice, to check the spread of the pandemic, threw the economy out of gear. For the first time in decades, the economy fell into a trough.

Several steps the Centre took to help industrial sectors which were in distress did not yield expected results. Industries were able to resume production with the government’s help but there was not enough money in the hands of the consumer to buy the products.

The government took a long time to learn the importance of putting money in the hands of people in the kind of situation that had developed. As a result, the economy troughed again while efforts were on to lift it. Luckily for the government, Covid took the blame for its failures too.

The slide in the economy is borne out by figures about the gross tax revenues earned by the Central government. During the first 11 months of 2019-20, they fell by 0.9 per cent. During the same period in 2018-19, they had risen by 7.9 per cent. This shows that the economy was already in trouble when Covid struck. This limited the government’s ability to counter the impact of Covid-19.

Three years have passed since then. Going by the assessment of global rating agencies, the economy is still not out of the woods.

In June, Fitch had forecast that India would register a 7.8 per cent growth in the Gross Domestic Product in the current (2022-23) financial year. Last week it lowered the growth forecast for the year to 7 per cent.

What’s more, it now expects GDP growth to slow further to 6.7 per cent in the year 2023-24 as against the earlier forecast of 7.4 per cent.

India is just one of the many countries that are finding the going tough in the post-pandemic period. Occasionally it comes up with high growth figures. Often this happens because the figures for the corresponding period of the previous year were very low.

In the quarter ending June this year India’s GDP growth was the second worst among the G20 nations, according to data released by the Organisation for Economic Cooperation and Development.

The data showed that the Indian economy recovered in the second quarter of 2022 with growth of 13.5 per cent year-on-year. This was below the expectation of an increase of 18.5 per cent in June y-o-y.

Seasonally adjusted estimates show a 3.3 per cent quarter-on-quarter decline in the second quarter of 2022 though this seemed to be at odds with high-frequency indicators.

Given the global economic backdrop, the Indian economy was expected to slow down, Fitch said.

India Ratings cut GDP growth forecast for 2022-23 from 7 per cent to 6.9 per cent.

Another agency, Moody’s, cut India’s economic growth forecast to 7.7 per cent. It pointed out that although inflation eased slightly to 6.7per cent in July, it remains above the RBI’s target range of 2-6 per cent.

Recognising that inflationary pressures are hitting economic recovery, since May, the Reserve Bank of India has focussed on steps to check them.

Fitch said it expected RBI to raise lending rates to 5.9 per cent before the year-end.

The revised Indian GDP growth forecasts needs to be viewed in the context of global trends.

Fitch Ratings’ September 2022 Global Economic Outlook includes deep and wide cuts to global GDP forecasts.