Date: 02/03/2023

Relevance: GS-3: Effects of Liberalization on the Economy; Balance of Payment and Trade balance of India.

Key Phrases: Foreign Trade deficit, Export and Import, LPG Reforms, Institutional Setup, Regulatory Framework, Import Cover, Policy stability, Tariff and Non Tariff Barrier, Developing Nations, Recession, Russia-Ukraine War.

Context:

• There is now a consensus on India emerging as the second fastest growing economy for the second successive year in FY24, despite the slowdown in the West.
  • This requires the assessment of India’s growth path with respect to the rest of the world.

Key Highlights:

• ‘Make in India’ campaign was launched to foster export promotion and import substitution.
• The PLI scheme gives outright subsidies to around 14 sectors for making a certain quantum of investment that is linked with incremental output that would finally be rewarded with a 4-6 percent payback.
  • This has also been a means for both import substitution and exports promotion.
• While the WTO expects global goods trade to grow just 1% in 2023, CARE expects India’s exports may rise 1.5% in 2023-24.

Major Concerns for the Indian Economy:

• The question that arises is that if we have made progress on exports, then there should be some adverse impact on growth when a part of the developed world slips into a recession.
• In a globalized world, there could be spillover effects in other areas, especially in foreign investment flows through both the direct and portfolio routes, which would slow down.
• A recession in the West would also mean that demand for Indian labor as well as computer related services would come down.
  • These could affect our balance of payments.
• ECBs and NRI deposits too will get impacted depending on the policy of interest rates, especially in the West.
  • Rising rates in the US would make ECBs dearer and NRI deposits more attractive in local territory, which will have a negative impact on domestic funding flows.

Analysis of India’s Economy:

• The Analysis is done to see how different components have moved along with GDP (at current prices) in the last decade.
  • Data for the last 10 years have been considered here and the average for the last two quinquennium has been considered.

• Following points emerged from the analysis of the last decade.
  • The ratio of exports to GDP has come down over time.
    • The good part of this story is that India’s growth is primarily driven by domestic factors and hence decline in exports does not affect GDP growth significantly.
    • The not-so-good part of this story is that even though a lot of push has been given to exports with specific emphasis on sectors that have a comparative advantage, they have not quite managed to carve a niche.
    • Therefore, while a steady growth in exports will supplement domestic growth, we are far from being an export-led economy.
  • While software receipts growth in rupee terms has been 56 per cent in the last five years, the GDP it has lagged and hence in relative terms has not kept pace.
    • Quite clearly this will be an area of concern in FY24 if the recession hits the demand for these services.
  • The Fall in the ratio for remittances is also considerable, as it has declined from 3.5 per cent to 2.8 percent.
    • Here too growth has been just 35 per cent in rupee terms for the average remittances in the two quinquennium.
    • The pace of growth has not been in line with the GDP growth even though it has been rising.
    • So there can be an impact at the margin due to the global slowdown.
  • FDI flows have been very positive with growth of 89 per cent in rupee terms in the last five years.
    • The flow of FDI depends on both push and pull factors.
    • The pull factor is strong with the economy doing well and the policy framework in place.
    • However, the push factor will depend on both the quantum of investible funds available.
    • Therefore the net impact needs to be monitored closely.
  • The ratio of FPI to GDP has come down sharply due to the negative flows witnessed in three of the five years.
    • In a way this should provide comfort; even if these flows are minimal, they will not affect our markets as the indices have ballooned notwithstanding these negative flows.
    • Domestic institutions have provided insulation to a large extent.
  • The net NRI deposits have been negative on an average basis in both the periods.
    • This means that there is no reason to be dependent on them for support from the point of view of balance of payments.
  • ECBs too have seen a decline from 1.4 per cent to 1 per cent and would not be attractive at a time when the interest rates are rising all over.

Way Forward:

• Based on the above analysis, It can be said that India still remains a largely domestic economy which provides strength to growth.
  • But a recession does have implications for the external sector where inflows can get dented at the margin.
  • Cumulatively they have the potential to pressurize the rupee which will remain a variable to be monitored closely by the RBI.
• Services exports and remittance inflows may cushion India’s current account deficit from the goods trade imbalance and restrict the economy’s external vulnerabilities, but policy makers need to focus on ensuring a soft landing for factories in export-intensive sectors that are also massive employers so that the global gloom does not hit domestic sentiment.

Conclusion:

• Keeping an eye on market realities to respond deftly to emerging challenges is vital for India to sustain through the coming turmoil and perhaps, even expand their share in the global trade pie.

Source: The Hindu BL

Mains Question:

Q. What are the possible concerns for the Indian economy in the time of global recession? Also, suggest measures to address these concerns. (150 Words).