To continue to lead, India must press harder on the reforms pedal, and celebrate the small victories in the ongoing economic world war
Inflation will spare neither small nor large economies. The US will see an inflation rate of 8.1 percent, Germany 8.5 percent, India 6.9 percent, and the UK 9.1 percent. China (2.2 percent) and Japan (2.0 percent) are the large economies that will buck the trend. On the other side, at 73.1 percent, 72.4 percent, 48.2 percent, and 20.6 percent, the assault of inflation will be brutal on Turkey, Argentina, Sri Lanka, and Ukraine respectively. To control inflation, central banks of all democracies will increase interest rates, the trend for which has begun. Barring China, Japan, Indonesia, Russia, and Turkey, all large economies have raised interest rates in September 2022—the US and Europe by 75 basis points, India and the UK by 50 basis points. The policy rate in Brazil stands at 13.75 percent, Hungary at 13.0 percent, and Chile at 10.75 percent. Raising interest rates may or may not control inflation, as the issue is of reduced supplies and high prices of food and fuel, which monetary policy cannot control. But they will certainly reduce non-essential consumption. And they will slow growth. Which means companies will hold back their investment plans, perhaps lay workers off, or outsource labour to cheaper markets. What we have at the household level, therefore, is the double-whammy of rising cost of living (inflation led by food and fuel bills but spilling over into other areas as well) on the one side and potential job losses or reduction of income on the other. The politics of high inflation and low growth can be lethal for those governing democratic nations—there is no bigger truth that speaks to power than high prices. No country will be exempt; no leader of a democracy will be excused. This projected contraction is not a figment of imagination. More than two out of five or 43 percent economies (31 out of 72) will see a contraction in their real GDPs in 2022-23. That’s what economist call a recession, even if the US is uncomfortable with the word, its opinion makers craft new narratives to fix the term, and US President Joe Biden gets busy trying to blunt the facts.
Raising interest rates may or may not control inflation, as the issue is of reduced supplies and high prices of food and fuel, which monetary policy cannot control.
Three countries with GDPs of more than US $1 trillion each will be the worst hit—the world’s fourth largest and the EU’s largest economy, Germany, whose 2023 GDP has been forecast to contract by 0.3 percent in 2023; Italy, the world’s eighth largest economy will see a contraction of 0.2 percent; and Russia, the world’s eleventh largest economy that will face the impact of sanctions and contract by 2.3 percent. Of these three, German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi will . With Russian President Vladimir Putin standing on the edge of the country’s nationalistic highs, scaling down militarily will be difficult, the economy notwithstanding. That said, the geopolitical realignment of energy supply chains will be permanent. He appears to be unaffected today, but in the medium term the Russian economy will fare worse—when everything is a weapon, everyone is a victim. The fall in the growth projection of the US, from 5.7 percent to 1.0 percent is sharp and US President Joe Biden has his work cut out, even as China stands at its economic gates. But pulled down by high energy prices, the fall in countries belonging to the Euro area, from 5.2 percent to 0.5 percent, is sharper. At 0.3 percent, the UK will barely stay afloat. But here, Prime Minister Liz Truss seems ‘lost in denial’, serving constituents that oppose the Free Trade Agreement with India, for instance, rather than tackling the looming recession ahead—despite narratives, it’s not going to be a happy Diwali for the India-UK FTA. Saudi Arabia, a leader-member of OPEC (Organisation of Petroleum Exporting Countries), a cartel-like club that colludes to manage oil prices, will benefit from the manipulated higher oil prices through reduced supplies. But like Russia, it may be short-lived. The IMF Outlook points out to a growth swing that will give commodities markets a run for their volatility—the oil rich nation will see more than a doubling of its growth rate to 7.6 percent in 2022 from 3.2 percent in 2021, only to fall back to 3.7 percent in 2023. It will make short-term gains at the cost of choked oil supply chains from Russia, but will return to mean when those costs slow the world down and hammer down the energy markets. This downtime will be a good opportunity for Prime Minister Mohammed bin Salman Al Saud to steer the oil nation towards economic diversification through its Vision 2030.
The politics of high inflation and low growth can be lethal for those governing democratic nations—there is no bigger truth that speaks to power than high prices.
In fact, the ongoing energy shortfall, driven by strategic interests following the Russia-Ukraine conflict, is impacting economies in more ways than one. Study the directional data of Russia’s oil exports and despite all virtue-signalling noise, the Euro Zone continues to be its biggest destination. Between March 2022 and August 2022, Russian oil exports to the Euro Zone area fell but they continue to be more than what was exported to China and India. This is contrary to the narratives being pushed out by Western media outlets that are busy energy-shaming India and China. “India and China undercut Russia’s oil sanctions pain,” reports Financial Times. “India's imports of Russian oil jump fivefold, helping war efforts,” reports Nikki. The anti-India narratives continue even as the EU continues to buy Russian energy. These double standards are leaving behind a foul smell. If buying Russian energy is equal to financing Russia’s attack on Ukraine, as ‘reported’ by these media outlets, and boycotting Russia is the answer to protect the Ukrainian people, a 35 percent fall in Russian oil exports to the EU is neither here nor there. Europe needs to stand up and answer this question: Is Russian oil good or bad? If bad, stop importing it. If good, stop crafting narratives that shame other countries for buying Russian oil. The narratives around the ongoing energy-inflation crisis are, once again, forcing us to question every news report, analysis, and opinion the Western press spews out. Our conclusion: The Western media is not reporting facts anymore and are no different from the Chinese state-owned media. Until it returns to reporting facts and offering independent opinion, we do not need to take them seriously anymore—they must not intrude into or cast an influence on India’s policies. Their economics reportage is an extension of their political anti-India stance. The facts are as follows. In the global growth stakes, India remains the least-hit outlier. That doesn’t mean it will remain unaffected. A contracting or stagnant EU or US will impact India’s exports. A rise in oil prices will overflow into higher fuel prices. Global food shortages will raise prices everywhere, including in India. The resultant inflation will show up. To manage the currency-inflation equation, the Reserve Bank of India will raise interest rates.
Study the directional data of Russia’s oil exports and despite all virtue-signalling noise, the Euro Zone continues to be its biggest destination.
But food security and its distribution to the poorest will not be impacted. Consumer enthusiasm may dampen on non-. Companies may hold back investments but, for now, . Looking at India outside-in, corporate migrants from China need a destination to land. That destination is slowly becoming India; . Overall, the financial management of the economy has been efficient and, in the foreseeable future, will continue to be. Of course, there are structural problems that need to be addressed. India’s compliance universe needs to get rationalised, and steps are being taken in that direction. We need to reduce the often-irrelevant 19th-century regulatory system that stands on the theory of suspicion and replace it with a forward-looking 21st-century framework that enables and encourages the creation of large enterprises, jobs, value, and wealth. The high cost of energy needs to be addressed. The productivity of labour needs to rise. The incremental capital output ratio needs to fall—the past trends of 3.7 to 4.8 need not be restrictive; technology can enable a productivity hyperjump. Geopolitics is increasingly spilling over into domestic economies and like all other countries, India must continue to press the reforms accelerator harder, functioning within the constraints and opportunities the global economy throws up. This is not the time to rest on past laurels. It is a time to read global trends and silently bring change. And, of course, celebrate the small victories in ongoing economic world war.
Until it returns to reporting facts and offering independent opinion, we do not need to take them seriously anymore—they must not intrude into or cast an influence on India’s policies.
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Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...Read More +