India’s robust growth momentum may create macro stability challenges for economy

To mitigate the impact of the Russo-Ukrainian war on the Indian economy, policymakers have deployed significant fiscal and monetary resources. Measures taken by the RBI have helped India’s economic performance, which has arguably outperformed its peers as the growth recovery has been robust while inflation has risen much less than other economies. However, according to analysts at Barclays, this economic resilience has come at the expense of material fiscal support in the form of price stabilizers, as well as the loss of foreign exchange reserves to keep the rupee relatively stable.

India’s macroeconomic stability is finely balanced, even after a fall in commodity prices, as strong growth and falling inflation are offset by a large current account deficit and fiscal deficit. As the global economy will slow, India’s robust growth momentum could eventually lead to macro stability challenges, Barclays noted.

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Despite the looming global slowdown and threat of recession, Barclays believes India’s economy stands out as an outlier as it benefits from improved food security, deleveraging private sector balance sheets and more room to use fiscal tools to offset the relative price shocks it faces weaker exchange rates, high inflation and rising interest rates. “We are comfortable with our baseline view of India’s growth slowing to 6.5% in FY23-24 from 7.0% in FY22-23 amid strong consumption and continued fiscal support,” Barclays said in his report, adding that India’s domestic momentum is strong enough to generate growth of at least 6% over the next two years.

Accelerated growth path ahead of a deteriorating global environment to bring risks of a broader CAD, a more rigid fiscal deficit profile and high inflation

However, analysts at Barclays believe that a potentially faster growth path amid a deteriorating global environment, elevated interest rates and still high commodity prices would carry the risks of a larger current account deficit, a more intractable fiscal deficit profile and higher inflation averages over the cycle. “Besides, the policy buffers in the form of fiscal space and foreign exchange reserves are much smaller than at the beginning of the Russia-Ukraine conflict, reducing the policy space to continue with the same intervention policy,” they said.

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Questions about India’s macro stability will increase

According to the report, India’s economy appears to be in a counter-cyclical sweet spot as the fourth quarter of ’22 begins, with growth appearing to be on more stable footing than other major economies, while inflation rates are not as high as in the West. The relative economic strength of the Indian economy means that barring unprecedented global or domestic events, annual growth of at least 6.0-6.5% yoy can be achieved over the next two years. Underlying demand appears strong as households and businesses benefit from countercyclical fiscal tools such as tax cuts and subsidies.

Domestic tailwind: The main factors supporting momentum in various domestic sectors come from fiscal support (which is unlikely to come down), the inflation curve (which seems to have peaked), and healthier, cleaner balance sheets from both financial institutions and households.

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Deeper Isolation from External Headwinds: The domestic orientation of the Indian economy should help provide a buffer against negative impacts from the weakening external environment, the research firm noted.

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“Strong growth – against a backdrop of elevated inflation, large current account deficits and tight fiscal positions – could weaken some macro-stability indicators. Concerns remain about India’s large current account and fiscal deficits amid still high commodity prices and fiscal support to curb inflation. These risks to macro stability may increase if growth accelerates too much,” Barclays said. Analysts are forecasting GDP growth of 7.0% in FY23, with the underlying trend resilient and no domestic factors to weigh on the growth recovery.

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