HIGH GROWTH WILL BE A TOUGH ASK

INDIA'S GROWTH IN FY23-24 WILL SLOW AND THE TEMPTATION TO EASE FISCAL AND MONETARY POLICIES IN RESPONSE WILL BE HIGH. BUT GOOD MACRO MANAGEMENT REQUIRES KNOWING WHEN TO SAY NO

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The consensus narrative on the Indian economy is that it is recovering strongly despite an unprecedented confluence of global headwinds, namely Russia's war and the associated surge in global commodity prices, the sharp slowdown in China, and the aggressive monetary tightening by the US Fed. Domestic inflation, while still high, has begun to ebb. Fiscal deficit, buoyed by strong revenue growth, is on a consolidation path and monetary policy has been tightened appropriately. The only material concern is the sharp widening of the current account deficit (CAD) due to high global oil prices and strong non-oil import growth because of the recovery in domestic demand. The weakness in the rupee stems from the difficulty to fund the large CAD when global interest rates have shot up and the dollar is at its strongest in decades. Substantial foreign exchange reserves have been expended in trying to moderate the volatility in the rupee, but the worst is behind and forex reserves remain adequate to withstand any disruptive shocks. Given the trying global environment, this is as good as any goldilocks scenario can be.

Here is an alternative narrative. The economic recovery, while impressive in its pace, in level remains 7 per cent below that implied by the pre-pandemic growth trend. As such, it is incomplete and the economic loss from the pandemic is likely to be large and permanent. More importantly, the pace of growth is set to slow sharply over the next two quarters. The government and the RBI see growth this year to average 6.5-7 per cent. If in the first two quarters of the fiscal year, the run rate has been 13.5 per cent and 6.3 per cent, then for the average to be 6.5-7 per cent, the pace in the second half of the year must slow to 4-5 per cent. It's not economics, just the tyranny of arithmetic!