The year 2023 does not seem to start on a cheerful note as there is a shadow of gloomy uncertainty. This holds for the global economy for sure, and can percolate to the domestic shores.
The three areas of concern for the global economy are Covid, recession and war. While there is no reason to believe that Covid will come back in a big way across the globe, the Chinese situation is alarming and does raise a lot of déjà vu as this is how it began in 2020. The reaction so far does not seem to be very different from what happened in 2020, where to begin with restrictions on human movement have been placed for anyone from China. Hence, if it were to spread, the possibility of different kinds of lockdown cannot be ruled out.
The war too shows no signs of ebbing and while it has become mainly a Ukrainian problem, the effects on the energy sector will be known in the coming months. Russia will most probably cut off supply of oil and gas to Europe, which can create turbulence in the energy markets. This may not be a problem for India where we have established different relations with Russia for purchase of cheaper oil.
Third, the recession in the West will be a reality as central banks continue to increase rates, though less aggressively. The main purpose of raising rates is to slow down growth which will be achieved in course of time. This is why all predictions of growth for 2023 point to lower numbers which at times can turn negative. The implications of a recession would be positive on inflation as prices of commodities should ideally come down, barring energy which will be driven by geo-political factors. Lower growth would also mean a decline in trade which will have repercussions on other developing countries — especially those dependent on exports.
Closer to home, the Indian economy is also projected to grow at a slower rate — which can be in the region of 6-6.5% — in 2023-24. Here too the RBI has been increasing the repo rate to slow down the growth in credit by raising borrowing costs and cutting back on unnecessary credit. This would mean three things. First, the pace of job creation will slow down considerably as companies become more discerning on employment. Second, consumption will be disadvantaged as the pent-up story has now ebbed and households will realise that cumulative inflation of 20% in the last three years has come in the way of demand. Third, following the plateauing of consumption in 2023, there will also be less incentive to invest and the present trend of investment taking place mainly in the infra-related sectors will continue.
The positive aspect of the global scenario and domestic economy is that inflation will be more under control and to this extent it may be expected that RBI will pause with repo rate hikes which will peak at 6.5% in February before levelling off. Depending on the exact trajectory of inflation we may also expect the RBI to consider lowering rates towards the end of the year, though it will be largely data-driven. In a way one can say with some level of confidence that the worst of inflation is behind us.
Also connected with the global recession is the fact that the dollar will no longer be as strong as it was in 2022 when it passed the parity level with the euro. This will be good news for other currencies, as most of them depreciated in 2022 more due to the dollar strengthening than weaker fundamentals. The rupee also bore the brunt of this phenomenon with deprecation of almost 10% during the year. This will be obviated, though the weakening fundamentals will continue to pressurise the currency with exports in particular slowing down further.
Against this background, how would one evaluate the overall state of the economy? Agriculture will play a critical role in supporting the growth process as this would proceed independent of what happens across the world. Also, as India is largely a domestic economy where demand emanates from within, the recession will not hit that hard. This is one reason why India will still continue to grow by a rate of above 6% which will be impressive. But this also means that as long as growth remains less than 7-8% it would take that much more time to attain the target of $ 5 trillion which has been spoken of. This will hence be the second successive year of consolidation for the economy.
Corporates will have to be more watchful once again. In 2022 topline growth was swift while profits lagged mainly due to high input costs. The tables will turn and input costs will be under control with benign commodity prices. However, scoring a good run rate in turnover growth will be a challenge given virtually stable consumption and investment in the economy. Against this background, it would be interesting to see how the stock market performs. A level of 60,000 for the Sensex, which has been taken for granted, will form the base for future growth. In 2022 the Indian market was a better performing one. Under the conditions outlined, scaling up to 65,000 would be commendable. Anything higher would be a bonus.
Madan Sabnavis is Chief Economist, Bank of Baroda, and author of ‘Lockdown or economic destruction?’ Views are personal