Opinion How the Indian economy has been navigating a changing world

In contrast, non-food inflation has been quite subdued, benefitting from lower commodity prices and easing supply chain pressure. Core inflation, calculated by stripping food and fuel from headline inflation, dropped to 4.5 per cent in September. Headline CPI, however, remains above the monetary policy committee’s target of 4 per cent. In the base case, we expect CPI inflation to average 5.5 per cent this fiscal, down from 6.7 per cent in the last, and the RBI to start cutting rates by the first quarter of the coming fiscal. India’s external account has continued to display relative resilience. The current account deficit is in the safe zone and foreign exchange reserves remain sufficient at over $580 billion. India’s resilient performance in the first half of the fiscal has played out in the backdrop of mixed trends in key economies. While Europe and China are experiencing a growth slowdown, the likes of the US have exhibited resilience.

Economic prospects will be shaped by interaction of local and global developments, which can take the shape of cyclical factors, shocks and structural changes. We use this framework to assess India’s outlook in the near and medium terms.

Cyclical aspects such as high interest rates, slowing global growth and persistent shocks (the latest is the Middle East conflict) have a more pronounced impact on the near-term outlook. These are set to test the resilience of the domestic economy in coming quarters.

Globally, inflation remains the dominant concern and threatens to keep already high interest rates higher for longer. S&P Global believes this will result in sub-par growth in the US next year and the year after. Europe is on weak footing this year and weakness will persist. Data for four decades show domestic growth cycles have got synchronised with advanced countries because of greater integration of trade and financial flows.

The share of India’s exports to the European Union (EU) and the US have risen and those to the Asia Pacific region have fallen over the last four years. Greater trade exposure to the US/EU means a cyclical slowdown there will have a bearing locally. Then, there are two ongoing geopolitical conflicts — the Middle East and Russia-Ukraine. Escalation can lead to a flare-up in crude oil prices and create stress points for growth, inflation, public finances and external accounts. If we overlay this on domestic developments such as the adverse impact of erratic weather on agriculture and the lagged impact of interest rate hikes by the RBI on interest rate-sensitive segments, growth is likely to be moderate in coming quarters. PMIs for services and manufacturing, while still in strong expansion zone, have come down in October.

That said, even with a slowdown to 6 per cent from 7.2 per cent last year, India will be the fastest-growing large economy this fiscal.

Our medium to long-term growth narrative will be influenced by structural developments taking place on an unprecedented scale, such as shifting globalisation, technological disruptions, climate action and demographic transitions. Shifting globalisation — which includes supply-chain diversification, tariff wars — together with an ageing population is pulling down global growth potential.

According to a recent World Bank report, global growth is expected to fall to a three-decade low of 2.2 per cent a year between now and 2030, down from 2.6 per cent between 2011-21 and 3.5 per cent in the preceding decade. While India’s economic cycles have got synchronised with those of advanced countries, its long-term trend rate of growth follows a divergent path. The trend growth in advanced countries has been moving down even as India’s has moved up due to opening up and economic reform since the early 1990s.

As growth potential across advanced countries slows, India can retain and perhaps improve its growth prospects by building infrastructure — both digital and physical — and undertaking growth-enhancing reforms to improve ease of doing business, besides latching on to the tailwind from diversifying global supply chains. However, India will have its own challenges.

For instance, India is trying to make infrastructure and manufacturing — both carbon intensive — its key growth engines. Climate change-related action will, therefore, pose a unique challenge. The second challenge is making growth labour-intensive, with focus on improving women’s participation.

On balance, we believe India can sustain about 6.7 per cent per year growth till the end of this decade, only a tad higher than 6.6 per cent per year in the decade preceding the pandemic. This will make India a $6.7 trillion economy and catapult it to middle-income status by 2030-31.

Joshi is Chief Economist and Deshpande is Principal Economist, CRISIL Limited. Views are personal.