Global including India's economic improvement will be modest.

 THE PRESENT STATUS OF ECONOMIC CONDITIONS AND OUTLOOK OF THE WORLD, AND INDIA

Now in considering the global economics in September 2022, most of the countries now mention inflation as the main risk to growth in their home economies for the second quarter. Geopolitical volatility and struggles are still found the main concern and it gas well, most often cited as the greatest risk to global growth over the next 12 months. The global economy is primarily downbeat matching in outlooks has emerged, as Europe express deeper concerns over energy price volatility and more somber views about their domestic economies. North America, on the other hand, was less negative about their countries’ current economies than in the previous survey. 

Local variances also reflect that the private sector affected by the cost soars make the most upsetting their companies. European opines utmost factor that impact of rising energy prices, on the same issues India and North America lean towards to point toward wage increases. After considering all factors, almost everybody agreed that their companies have seen cost increases in the past six months, and a majority have raised the prices of their products or services. Most also foresee their organizations’ operating expenses increased in the coming months.

Global Economic outlooks appear bearish  

In June 2022 survey, it was already assessed negative economic conditions. But now also, it is found bleak too.  Even the forward scenario does not provide any hope, and in view of previous assessments as dismal, and fear of gloom global conditions may be weakened in the next six months, but vary significantly by region. However, those in Europe and North America offer a pessimistic view of both current and future global conditions, on the contrary, China is mostly positive about the present and the future. Overall, for the third quarter this year, geopolitical instability and conflicts remain the most-cited risk to global economic growth, and inflation remains the second-most-cited threat. But a variation from June 2022, volatile energy prices has displayed supply chain interruptions as the third-most-cited global risk.

On one side, Inflation remains a major concern for the world but in Europe and Greater China, the matter is not a major concern. The concern about supply chain disruptions as domestic economic risks has also reduced since June 2022, the supply chain challenges are now the fifth-most-cited risk to their countries’ economies, exceeded by concerns about rising interest rates. Inflation remains the most-cited risk to domestic economies for the second quarter, shadowed by volatile energy prices and geopolitical instability and conflicts but except for Europe and Greater China, inflation is the major risk to their economies over the next 12 months. In Europe, volatile energy prices and inflation are the growth risks cited most often, with geopolitical instability or conflicts a more distant third. In Greater China, the COVID-19 pandemic remains the most reported risk for the second quarter in a row.

As unease heightens in Europe, optimism builds in North America, similar to the June survey, some of them describe economic conditions in their countries have improved over the past six months. Even if the findings show new regional divergence. But in Europe are more downbeat than earlier this year, with most of them reporting that their economies have worsened. At the same time, in North America—where sentiment was closely aligned with Europe’s in the previous two quarters—they have become more positive since the previous survey. In Greater China, India, and Asia–Pacific, a majority say their economies have improved. But in Asia–Pacific, optimism has wavered. They are much less likely than in the previous survey to say that their countries’ economies have improved. Outlooks about the next six months also vary by region. Europe and Asia–Pacific is less likely than in June to expect their countries’ economies to improve, while other developing markets have become more hopeful. Overall, they are likely to expect their countries’ economies to improve as to worsen in the next six months, as was also true in the previous survey. Concerns climb up over companies’ prospects as per private-sector companies about the challenges their companies are facing and their expectations for the coming months. Almost all companies have experienced cost increases in the past six months, the main reason cited to rising energy prices which include electricity as well as fuel as having the biggest impact, followed by increases in the costs of materials.

The concerns over various types of cost increases vary by region. In Europe, the primary reason pointed to rising energy costs, whereas wage increases are of top concern in India and North America. Consistent across all regions, their companies have raised the prices of their products or services in the past six months. Looking ahead, most of them expect their companies’ operating expenses to be greater next year than they were last year. What’s more, expectations for companies’ profits and customer demand are the most downbeat that they have been since July 2020. The expectation to expect profits to increase is more than six months ago. The same share expects demand for their companies’ goods or services to increase. While concerns over the effects of supply chain disruptions on global and domestic growth have eased since the previous survey, those disruptions remain top of mind as a risk to company growth for the second quarter. Furthermore, a majority of those working in manufacturing—including those in automotive and assembly, aerospace and defense, advanced electronics, and semiconductors—or retail report that their companies’ inventory levels are not ideal. Most of them have too much inventory, while only a few say levels are too low. Looking specifically within the consumer goods and retail sector, they are just as likely to report too little inventory as too much, while a plurality says their inventory levels are about right. The companies in all manufacturing and retail industries reporting nonoptimal levels, nearly three-quarters expect their organization to achieve optimal levels within the next 12 months. Just one quarter after geopolitical conflicts and instability overtook the COVID-19 pandemic as the leading risk to economic growth, their concerns over inflation now exceed their worries about the effects of geopolitical issues on their countries’ economies. inflation as a growing threat to the global economy and continue to view geopolitical instability and supply chain disruptions as the top threats to both global and domestic growth.

Amid this disruption-crowded environment, respondents report uneasy views on economic conditions, both globally and in their respective countries. For the fourth quarter in a row, respondents to our latest survey—conducted the first full week in June—are less likely than those in the previous survey to say economic conditions have improved. Overall, pessimism about the second half of 2022 is on par with the early months of the pandemic in 2020. Exceptionally, however, the mood is much more positive among respondents in Asia–Pacific and Greater China, who report improvements and continue to be upbeat about their economic prospects. Therefore, Inflation, geopolitical, and supply chain concerns all loom large.

 WORLD ECONOMIC SITUATION AND PROSPECTS: OCTOBER 2022

 From just some months before, the U.S. dollar has reached historic high levels in two decades, as the United States Federal Reserve increased its interest rates belligerently since March 2022, amid obstinately high inflation. Higher interest rates and the relative stability of the United States economy have furthered the dollar’s appeal and activated the ‘flight to safety in the international capital market. The impact of the Ukraine conflict on energy prices has worsened the economic outlook in Europe, while COVID-19 shutdowns continue to destabilize China’s near-term growth prospects. For the developing countries, rising interest rates in the United States, and the appreciation of the U.S. dollar are rendering to rising costs of imports, higher inflationary pressures, rising debt servicing and borrowing costs, and worsening fiscal and current account balances, undermining the prospects of their full economic recovery from the pandemic. Currency depreciation and capital outflows are interdependent. The U.S. dollar index climbed by around 20 percent against a basket of global currencies during the past year.  Between June and September this year, the dollar index reached high historical values as the United States Federal Reserve raised its policy rates by 225 basis points. The global interest rate shockwave has been escorted by capital outflows from developing countries, mainly driven by the higher yields on long-term government bonds across advanced economies and the investor’s pursuit of relatively safe assets. Thus, between March and July 2022, close to US$ 32 billion flowed out of the developing and emerging markets.

Against the environment of international investors reducing their exposures in developing markets and capital outflows, the currencies of many developing countries have weakened significantly vis-à-vis the U.S. dollar during 2022. The Argentine peso, the Pakistan rupee, the South African rand, the Indian rupee, and the Indonesian rupiah depreciated meaningly against the U.S. dollar since the start of 2022. However, some Latin American currencies—such as the Mexican peso and the Brazilian real—benefited from stronger commodities prices and remained resilient during the first half of 2022. In this setting, many central banks in developing countries have interfered strongly to slow currency depreciation by selling their foreign-exchange reserves. However, for some developing economies, implementing the currency adjustment has been tough, especially given the limited stock of liquid reserves.

A few countries are bounding the trend as several Commonwealth of Independent States (CIS) currencies also thrust the trend and appreciated vis-à-vis the U.S. dollar. While the Russian ruble impetuously fell at the beginning of the war in Ukraine amid widespread economic sanctions against the Russian Federation, it recovered quickly and illogically became the best-performing currency globally in terms of its appreciation vis-à-vis the “hard” currencies. The ruble’s value soared despite double-digit inflation and contraction in the Russian economy, while half of its central bank’s reserves overseas remained frozen. This phenomenon is explained by a convergence of factors. Following the initial fall of the ruble, the Russian central bank sharply increased its policy rate and levied tight capital controls, while the Government required exporters to sell a large share of their foreign exchange earnings at the domestic market, reinforcing demand for the ruble. Also, the European gas importers were required to convert their payments to the Russian gas supplier into rubles. Meanwhile, the current account balance of the Russian Federation improved amid higher hydrocarbon prices and increasing oil exports to Asia while imports fell because of the sanctions. As a result, the Russian current account surplus reached an estimated US$183.1 billion in January–August 2022, way above the US$60.9 billion recorded for the same period last year.

Correspondingly, most of the CIS currencies sharply depreciated after the beginning of the war in Ukraine but the trend reversed quickly with significant inflows of capital from the Russian Federation. Many countries in the CIS and Georgia absorbed significant capital inflows from the Russian Federation (for example, money transfers from the Russian Federation to Armenia almost tripled in the first half of 2022 compared with the same period of last year, exceeding US$1 billion), as many Russian nationals and businesses, including the export-oriented IT sector, which is paid in dollars, shuffled to these countries. This is, however, likely to be a short-lived miracle and these countries will possibly face significant downside risks should the flow reverse.

 A stronger dollar is worsening the external debt burdens of developing countries. Many developing countries are particularly susceptible to a stronger dollar because their external debt stocks and debt service payments are mostly denominated in U.S. dollars. Governments in developing countries collect their tax and non-revenues in local currencies but service most of their external debt in foreign currencies, mostly denominated in U.S. dollars. Thus, when the domestic currency depreciates vis-à-vis the U.S. dollar, the debt service burden of the country can increase uniformly without any counteracting increases in tax revenue. Developing countries with high levels of external debt are particularly vulnerable to sudden tightening global financial conditions, as many governments borrow from the international capital market in the short term to service their long-term debt repayment obligations.

During the decade prior to the COVID-19 pandemic, developing countries benefited from strong capital inflows, particularly in Asia and Latin America. Low-interest rates and ample global liquidity invigorated many developing countries to borrow from the international capital market, which led to an increase in external debt in many countries. Also, fiscal support to mitigate the impacts of COVID-19 pushed debt levels in some countries to record highs. According to the World Bank, the external debt stock of low– and middle-income countries in 2020 rose, on average, by 5.6 percent, and for many countries, the increase was in double digits. Significantly weaker exchange rates, tighter global financial conditions, and slow economic growth have increased debt risks and susceptibilities across developing countries. The most affected countries are those where debt denominated in foreign currency represents a large share of their exports. In some countries, paying interest to creditors has become particularly challenging, especially in those that are facing large currency depreciations. Among regions, the share of dollar-denominated debt differs meaningfully. In the Middle East and North Africa, the share is relatively low compared to other regions, meanwhile, in Latin America, this share accounted for around 90 percent in 2020. Moreover, a stronger dollar also hurts economic growth in the long run a strong dollar can damagingly influence economic growth in developing countries by increasing the cost of capital and reducing public and private investments. As the United States Federal Reserve raises interest rates, the central banks around the world follow uniform and raise interest rates to prevent capital outflows and ease downward pressures on their exchange rate. But interest rate hikes increase the cost of domestic borrowing and reduce both public and private investments in the economy.

A strong dollar also adversely affects the price of imports, especially for developing countries that heavily rely on imports to meet domestic demand for food and energy. Most international trade is conducted in U.S. dollars. Between 1999–2019, the U.S. dollar share of global trade accounted for 96 percent of trade invoicing in the Americas, 74 percent in the Asia-Pacific region, and 79 percent in the rest of the world. Europe is the only exception, where the euro is the leading currency. While a strong dollar can help to contain inflationary pressures in the United States, it has the opposite effect on inflation in net food and energy importing developing economies. In the current geopolitical context, a stronger dollar is undermining the food and energy security of many developing countries, as the import prices of food grains and oil—denominated in local currencies—have risen sharply in recent months.

The “pass-through effect” of a domestic currency’s depreciation vis-à-vis the U.S. dollar depends on country features. Normally, a greater openness to trade and financial transactions, less credible central banks, more volatile inflation, and exchange rates, and lower levels of market competition are linked with higher pass-through effects on inflation. There is empirical evidence that economies with greater exchange rates pass-through to domestic prices and high shares of debt denominated in US dollars face a difficult policy trade-off between stabilization and inflation in managing adverse external shocks. The policy challenges for developing countries are even scarier now. There is little room to maneuver given the persistent supply-side holdups infuriating inflationary pressures and high levels of dollar-denominated external debt. As announced at the end of its FOMC meeting on 21 September, the United States Federal Reserve will raise its key policy rate to 4.25–4.4 percent by the end of 2022. The rate hikes will likely continue at least during the first half of 2023, with significant and adverse spillover effects on developing countries already caught in a downward spiral of low growth, high inflation, and high unemployment. The fading economic outlook for developing countries will likely further weaken their exchange rates in the near term, impairing capital outflows and further worsening their financing conditions. Against this backdrop, many developing countries will face a significantly difficult uphill battle to direct a vigorous recovery, and exciting growth and make progress towards achieving the Sustainable Development Goals (SDGs) aim to transform our world. They are a call to action to end further damage to economic conditions.

 WORLD ECONOMIC OUTLOOK ON GLOBAL ECONOMIC CONDITIONS AND WHAT THEY MEAN FOR INFLATION AND CLIMATE POLICY.

The global cost of living has soared, with inflation rising to 40-year highs in some economies. As countries recover from the COVID-19 pandemic, supply-demand imbalances stay, slowing economic activity and forcing prices up. Concurrently, energy and food prices have spiked amid worsening geopolitical tensions. UN agency attributes the decline in growth to the impact of the weakening global economy and the fiscal pressures that may prevent the govt from ramping up its overall capital expenditure beyond a point. Amidst global slowdown ringing alarm bells across the developing world, the Indian economy may grow 5.7% in 2022 and the growth will slow down by one percentage point to 4.7% in 2023, estimates the United Nations Conference on Trade and Development (UNCTAD).  The global economy is estimated to grow by 2.5 % in 2022. “India’s economic activity is being hampered by higher financing costs and weaker public expenditures, resulting in a deceleration in GDP growth to 5.7% in 2022. Going forward, the government has announced plans to increase capital expenditure, especially in the rail and road sector, but in a weakening global economy, policymakers will be under pressure to reduce fiscal imbalances, and this may lead to falling expenditures elsewhere. RBI slashes FY23 GDP growth forecast to 7% from 7.2%.

UNCTAD called India’s 8.2% growth in 2021 the strongest among G20 countries. “As supply chain disruptions eased, rising domestic demand turned the current account surplus into a deficit, and growth decelerated. The Production-Linked Incentive Scheme introduced by the government is incentivizing corporate investment, but rising import bills for fossil energy are deepening the trade deficit and eroding the import coverage capacity of foreign exchange reserves,” the report observed. The growth of the world economy is expected to grow 2.5% in 2022, more than one percentage point below the rate projected in last year’s report. It says the prospects of global economic growth appear to be worsening and predicted a 2.2% growth in the world economy in 2023. The concerns over ‘an unduly rapid tightening of monetary policy in advanced economies in combination with inadequate multilateral support’ as could turn a slowdown into recession, triggering vicious economic circles in the developing world with the damage more lasting than after the global financial crisis or Covid shock. For South Asia, UNCTAD expects a weakening economic expansion of 4.9% in 2022, as inflation increases on the back of high energy and food prices, exacerbating balance of payment constraints and forcing several governments to restrict energy consumption. By 2023, UNCTAD expects the region’s growth rate to decelerate further to 4.1%.

India's economic growth is expected to decline to 5.7 percent this year from 8.2 percent in 2021, on account of higher financing costs and weaker public expenditures. India’s GDP will further decelerate to 4.7 percent growth in 2023. India experienced an expansion of 8.2 percent in 2021, the strongest among G20 countries. As supply chain disruptions eased, rising domestic demand turned the current account surplus into a deficit, and growth decelerated, the report said. It noted that the Production-Linked Incentive Scheme introduced by the government is incentivizing corporate investment, but rising import bills for fossil energy are deepening the trade deficit and eroding the import coverage capacity of foreign exchange reserves. As economic activity is hampered by higher financing costs and weaker public expenditures, GDP growth is projected to decelerate to 5.7 percent in 2022," it explained. Going forward, the government has announced plans to increase capital expenditure, especially in the rail and road sector, but in a weakening global economy, policymakers will be under pressure to reduce fiscal imbalances, and this may lead to falling expenditures elsewhere. Under these conditions, the economy is expected to decelerate to 4.7 percent growth in 2023, the report forecasted. Various developments in the wake of Russia's invasion of Ukraine, including the US ban on oil imports from Russia, and prohibition of shipping insurance for Russian oil exports, have exerted more pressure on oil markets, it said. However, the release of 180 million barrels from the United States' strategic petroleum reserves as well as the readiness of both China and India to receive Russian oil exports proved sufficient to ensure that global oil supplies did not tighten further, it said. The report added that the share of commodities in China's and Egypt's imports is 38 percent, and more than 50 percent of India's imports are (primary) commodities including food and fuel. As a result, higher commodity prices have a strong impact on domestic prices via imports. It added that in the wake of the pandemic, higher spending on social protection and lower revenues from taxation led to higher public budget deficits in some emerging economies.

INDIAN ECONOMIC CONDITION IN THE SECOND QUARTER OF 2022 AND BY 2023

 The Indian economy expanded 13.5% year-on-year in the second quarter of 2022, the most in a year but less than market forecasts of 15.2%. Gross value added increased faster for agriculture, forestry & fishing (4.5% vs 2.2% in Q2 2021); electricity, gas, water supply & other utility services (14.7% vs 13.8%); financial, real estate & professional services (9.2% vs 2.3%) and public administration, defence & other services (26.3% vs 6.2%). On the other hand, a slowdown was seen for mining & quarrying (6.5% vs 18%); manufacturing (4.8% vs 49%); construction (16.8% vs 71.3%) and trade, hotels, transport, communication & services related to broadcasting (25.7% vs 34.3%). On the expenditure side, household consumption accelerated (25.9% vs 14.4% in Q2 2021) and government expenditure rebounded (1.3% vs -4.8%). Meanwhile, gross fixed capital formation slowed (20.1% vs 62.5%) and net foreign demand contributed negatively to growth, as exports rose 14.7% while imports advanced at a faster 37.2%.

  ABOUT INDIAN ECONOMY DURING 2023

 They had in May 2022 projected India's GDP to expand by 8.8 percent this year. The economy grew by 8.3 percent in 2021 and contracted by 6.7 percent in 2020, the year when the pandemic struck the country.  Updating Global Macro Outlook 2022-23 by Moody's revised and said  India's central bank is likely to remain hawkish this year and maintain a reasonably tight policy ted India's GDP to expand by 8.8 percent this year. The economy grew by 8.3 percent in 2021 and contracted by 6.7 percent in 2020, the year when the pandemic struck the country.  Updating Global Macro Outlook 2022-23 by Moody's revised and said  India's central bank is likely to remain hawkish this year and maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building further.

As mentioned above, India's real GDP growth will slow from 8.3 percent in 2021 to 7.7 percent in 2022 and decelerate further to 5.2 percent in 2023 assuming that rising interest rates, uneven distribution of monsoons, and slowing global growth will dampen economic momentum on a sequential basis. It expects inflationary pressures to weaken in the second half (July-December) of the year and further in 2023. A quicker let-up in global commodity prices would provide significant upside to growth. In addition, economic growth would be stronger than we are projecting in 2023 if the private-sector CAPEX cycle were to gain steam, it added.

Moody's said high-frequency data for the Indian Economy shows strong and broad-based underlying momentum in the first four months of the fiscal year 2022-23 (April-July). As per official GDP estimates, the Indian economy expanded 13.5 percent in April-June 2022-23, higher than the 4.10 percent growth clocked in the previous March quarter.

Moody's said services and manufacturing sectors have seen robust upswings in economic activity, according to hard and survey data, such as PMI, capacity utilization, mobility, tax filing and collection, business earnings, and credit indicators. However, inflation remains a challenge with the RBI having to balance growth and inflation, while also containing the impact of imported inflation from the year-to-date depreciation of the Indian rupee against the US dollar of around 7 percent.

India's economic growth before the COVID-19 shock had materially slowed because of the impact of corporate-sector deleveraging on business investment. "With the deleveraging complete, corporate-sector investment is showing early signs of a pickup, which could provide support to a continued business cycle expansion through several quarters, supported by investment-friendly government policies and the rapid digitization of the economy. Although inflation eased slightly to 6.7 percent in July, it remains above the central bank's target range of 2-6 percent for the seventh straight month.

The RBI forecasts that the inflation will remain high into 2023 and has hiked rates three times this year to 5.4 percent to tame inflation. The central bank is likely to remain hawkish this year and maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building further. 

CONCLUSION

We can easily observe from the above, there is subdued hope for improvement in the global/Indian economic outlook during FY’2022. Even if the improvement happens it would be not substantial.