The Runway To 2024
After months of economic headwinds caused by the Russia-Ukraine conflict and trade disruptions, India can see a clear runway ahead. The good news is that the economy has shown resilience despite high crude oil prices and inflation.
The economic revival is broadly dispersed. Factory output is up. The S&P Global India Manufacturing Purchasing Managers’ Index (PMI) rose to 56.4 in July. Monthly GST collections are trending at Rs 1.50 lakh crore. Real GDP in 2022-23 is set to grow at over seven per cent.
Real estate is a bellwether for economic health. While China’s realty market is in deep crisis, Indian real estate is experiencing a purple patch. Morgan Stanley has leased 1.45 million square feet in office space in suburban Mumbai for a total rent of Rs 2,000 crore spread over a 9.5-year lease period. Amazon has leased 2.39 lakh square feet at a rent of Rs 3.57 crore a month.
Foreign portfolio investors (FPIs) have returned to the Indian stock market after a 10-month hiatus and are now nett buyers of equity. While inflation has soared to over 10 per cent in North America and Europe, it has moderated to seven per cent in India with a declining bias.
For Prime Minister Narendra Modi, facing ten state assembly elections in 2022 and 2023 ahead of the 2024 Lok Sabha poll, it’s important that the post-Covid economy continues to revive and unemployment begins to fall. Jobs remain a weak spot on the economic horizon. The pandemic has forced many employees out of the organised sector and into gig work or self-employment. As a result formal labour participation is low.
The funding winter in startups is another worry though several founders speak of a “funding spring” around the corner. The Indian economy, like the global economy, is rebalancing itself. The war in Europe and the Covid pandemic have turned economic wisdom on its head. The United States is in technical recession. Inflation in Britain is at a 40-year high. Gas and food prices, according to one study, now take up the full disposable income of 1.2 million Britons, leaving nothing for other expenses.
As autumn arrives next month in the West, the fear of Russia cutting supply of piped gas has made several European countries call for Ukraine to seek peace with Russia before their economies suffer permanent damage. Germany, Europe’s largest economy is the most vulnerable. It depends on Russia for 35 per cent of its piped gas. Any further cuts by Russia could lead to closure of aluminium, steel, paper and automobile factories.
Britain’s Financial Times captured the scale of the crisis: “‘We have to stop (production) immediately from 100 to zero,’ said the chief executive of SKW Stickstoffwerke Piesteritz, the country’s largest ammonia producer and a key European supplier of fertilisers and exhaust fluids for diesel engines. Amid rising tensions between Moscow and the West over the war in Ukraine, Berlin fears a winter gas crisis that could paralyse industry and leave millions freezing in their homes. BASF, the world’s largest chemicals company, has warned that the steam crackers at its gargantuan site in the southwestern city of Ludwigshafen would be forced to idle if gas supplies dropped below 50 per cent of its regular requirements.”
In India, politics is never divorced from economics. With elections in Gujarat and Himachal Pradesh due later this year and eight assembly polls scheduled for 2023, including key battles in Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh, Modi needs the economy to fire on all cylinders.
The rollout of 5G telephony will spur automation across sectors, boosting the internet-based economy. One of the most important reforms in eight years of the Modi government is digitalisation of the economy. Transactions on UPI in July 2022 crossed six billion with a total value of over Rs 10 lakh crore. Farmers receive dues directly into their Jan Dhan Yojana bank accounts without middlemen siphoning off a cut. Subsidies to the poor, health insurance payouts and other benefits have streamlined welfare to an extent few thought possible.
In a world disrupted by conflict between two old Cold War rivals – Ukraine as a proxy for the US-led West and the Russian Federation as the progeny of the Soviet Union – Modi has been careful not to take sides. India will need Russian defence equipment in the forseeable future, especially spare parts for legacy fighter jets and warships. It also needs to buy cheap oil and gas from Russia as well as increase trade volumes with Moscow.
India’s exports declined slightly to $37 billion in July 2022 as the recession-hit West slowed buying. The Commerce Ministry is, however, confident of meeting its annual merchandise export target of $480-$500 billion. If services exports meet their target of $300 billion, India will be well on its way to becoming a $1 trillion trading nation.
Key free trade agreements (FTAs), though, have hit a speedbreaker. The India-UK FTA will have to wait for a new British prime minister to take office on September 6. The FTA with Australia is going through a slow legislative journey in Canberra, complicated by the election of a relatively new prime minister, Anthony Albanese.
The chaotic collapse of the Sri Lanka government and the near-default of international debt by Pakistan has focused the West’s attention on South Asia. Exactly a year after the Taliban took over Afghanistan, not a single country has recognised its regime. The oasis of stability in the region is India.
The US-China contest has meanwhile become sharper after Speaker Nancy Pelosi’s visit to Taiwan. Washington, more than ever, needs New Delhi as a bulwark against Beijing in the Indo-Pacific. China continues to deploy 50,000 troops of the People’s Liberation Army (PLA) on the Line of Actual Control (LAC). However, President Xi Jinping is under increasing pressure to seek a face-saving exit from the 27-month-long standoff in Ladakh.
The runway to the 2024 Lok Sabha election has three signposts: One, jobs and inflation; two, welfare benefits for the poor; and three, resurgent nationalism. The likelihood that the inauguration of the Ram Mandir in Ayodhya in early 2024 will cause polarisation has obviously entered into Modi’s electoral calculations. In the end, politics and economy are longtime bedfellows.
