Tackling The Slowdown

Good and bad news about the Indian economy continues to jostle for attention. The bad news is that GDP growth in 2022-23 will struggle to meet Finance Minister Nirmala Sitharaman’s target of seven per cent. The International Monetary Fund (IMF) has cut India’s projected growth rate in FY23 to 6.8 per cent.

Exports are the other worry. As the Russia-Ukraine war grinds on and the West slips into recession, global trade faces disruption. India’s merchandise exports in the first six months of the year (April-September 2022) though were a healthy $232 billion, up 17 per cent over the same period last year. But Industry and Commerce Minister Piyush Goyal’s target of $480 billion for FY23 now seems a stretch. Assuming the monthly September 2022 merchandise export figure of $35.45 billion is replicated in the second half of the year, exports for the full year could still be $440-$450 billion, only about five per cent short of target.

Fortunately, services exports too are robust. For the full year they should close at $320 billion, slightly short of the $350 billion target. Combined merchandise and services exports in a trade disrupted year will therefore be around a healthy $760-770 billion. That keeps India on target – assuming an annual export growth rate of 14 per cent – to hit $1 trillion in total merchandise and services exports by 2024-25. Once war clouds over Ukraine clear and recession fears in the West wane, a 14 per cent growth rate in total exports is clearly achievable.

Moreover, the Production-Linked Incentive (PLI) scheme has made India an export hub for cars, electronics and mobile handsets. The trend is still embryonic. It is likely to accelerate in the next few years as more sectors become eligible for the PLI programme.

The problem, however, is that merchandise imports continue to surge. The merchandise trade deficit in 2022-23 at over $300 billion will likely be the largest ever. This will be roughly halved by the expected services export surplus of $150 billion. That leaves at least $150 billion more to whittle down if the overall current account deficit (CAD) is to be kept within manageable limits. 

Remittances from Indians working abroad are likely to cross $90 billion, leaving a $60 billion gap. Foreign direct investment (FDI) and foreign portfolio investment (FPI) would normally close the gap. But with the rupee depreciating sharply against the US dollar (though appreciating against the British pound and Japanese yen), FPI inflows are likely to be negative this year, adding to the deficit. Foreign direct investment inflows may not fully close the gap, leaving India with a balance of payments (BoP) deficit of around $50 billion in 2022-23.

India usually has a positive BoP on the back of remittances, FDI and FPI. But 2022-23 is an unusual year. With nominal GDP expected to be over $3.5 trillion in FY23, the likely BoP deficit of $50 billion will be 1.4 per cent of GDP. That is challenging but not catastrophic. Given the global crisis, the US Federal Reserve’s interest rate hikes, and general trade disruption, matters could have been worse.

The IMF is bullish about India’s long-term growth story. It recently published its annual World Economic Outlook forecast that sees India overtaking Germany and Japan to become the world’s third largest economy by 2027-2028, two years before previous projections.

According to World Economic Outlook, India’s GDP in 2027-2028 will be $5.36 trillion. The IMF-produced report also projected the GDP of various countries by purchasing power parity (PPP). In PPP, India’s GDP in 2027-28 is forecast to be $17.85 trillion compared to China’s $42.05 trillion. The GDP (PPP) gap between China and India in 2027-28 will thus narrow to 2.3x. 

What about per capita income (PPP)? Since both China and India will have a population of around 1.40 billion in 2027-28, China’s per capita income would be around $30,000 and India’s $13,000. The per capita gap, taking into account differences in costs and wages (as PPP does), will again be 2.3x.

The IMF’s calculation could go wrong on two counts. One, ageing China’s annual growth rate may slow over the next five years. Two, India’s youthful demographics may lead to higher growth rates. Put together, the per capita income (PPP) gap between the two countries could narrow further by 2027-28 to 2x or less.

How credible is the prognosis that China’s growth rate is heading south? One commentator remarked acidly that President Xi Jinping – who won an unprecedented third five-year term at the Chinese Communist Party’s 20th National Congress in Beijing – is dismantling, one by one, every economic reform of Deng Xiaoping.

Meanwhile, on October 14, 2022, the United States dropped an economic bomb on China’s chip industry that could, as one analyst said, send China to the Artificial Intelligence (AI) stone age. What exactly did the Joe Biden administration do to potentially cripple one of China’s key technology sectors?

According to Britain’s Financial Times, “Under new export controls announced on October 14, 2022, semiconductors made with US technology for use in artificial intelligence, high-performance computing and supercomputers can only be sold to China with an export licence – which will be very difficult to obtain. ‘To put it mildly (Chinese companies) are basically going back to the Stone Age’, said Szeho Ng, Managing Director at China Renaissance. Paul Triolo, a China and technology expert at the Albright Stonebridge consultancy, said: ‘There will be many losers as the tsunami of change unleashed by the new rules washes over the semiconductor and associated industries.’ He added the impact would be especially profound on Chinese companies that use US-origin hardware to deploy AI algorithms, including for autonomous vehicles and logistics, as well as medical imaging and research centres using AI for drug discovery and climate change modelling. ‘That is a bigger bombshell than stopping us from buying equipment,’ said a human resources executive at a state-backed semiconductor (Chinese) plant.”    

India is building its own chip industry with the Adani Group drawing up ambitious plans to set up large semiconductor fabrication units (fabs). While Indian policymakers keep a close eye on this year’s GDP growth rate and CAD, they will follow with equal interest the chip war the US has declared against a predatory China.