Looking Ahead To 2023: India Is Sure-Footed, Even As Chinese Economy Falters

International Monetary Fund (IMF) managing director Kristalina Georgieva recently referred to India as a “bright spot” on the dark global horizon and credited the country’s post-Covid-19 pandemic growth momentum to structural reforms.

Even the harshest critics of the Narendra Modi government should agree that Georgieva was right.

The denationalisation of the coal mining sector, goods and services tax, huge financial and digital inclusion programmes, sustained push to ease logistics bottlenecks and paving the way for domestic manufacturing with an eye on the export market, have started yielding results.

In a highly connected world, growth numbers will vary depending on the global scenario.

However, there is little doubt that India became more investor-friendly in recent years.

The startup revolution and meteoric rise in the unicorn population were glaring proof of the improved ecosystem.

The Indian electorate’s choice for a strong federal government and the fine balance maintained by the Modi government between politics and economics, were major factors behind the exceptional run of the Indian economy.

In a connected world, domestic politics cannot be free from global influences. The success of the Modi government lies in upholding India’s economic interests in one of the most turbulent phases in world politics since the Second World War.

 A look at the world economy will prove this was no mean achievement.

Perilous Precedence Of Politics

Economic turmoil is not new to the post-Cold War world. However, rarely was there a phase when all leading economies the US, Europe and China were in turmoil together.

The precedence of politics over economics made the situation perilous.

The US is riding on the strength of the dollar as a global currency and is proving to be the biggest growth barrier to the world. They had first fuelled inflation at home by pursuing a super-easy money policy.

The corrective measures reduced policy space for central banks around the world.

Meanwhile, the US sanctions had sent energy prices through the roof, bringing windfall gains to Russia.

To survive the mid-term poll, the Joe Biden administration was pushing for suppliers’ cartels in oil and gas. This is potent to cause fresh disruptions in the already disrupted energy market.

Europe has been living in la-la land for too long. Dole economics and the Ukraine conflict had together taken them to mat.

It is a common guess that to survive they need to cut down on welfare budgets and walk the path of reforms. But looking at the UK one would know that they are going nowhere.

The more their economies grow weaker, the more the West will ride on politics to remain relevant.

The juvenile call by the German Foreign Minister for the “engagement of the United Nations” in Kashmir; downgrading India’s democracy ranking to the level of Myanmar or Russia; publishing a hate advertisement in the Wall Street Journal — are part of this script.

Both the US and Europe had undergone many boom-and-bust cycles in the last three decades. But the country that kept the growth engine chugging was China.

That paradigm now seems to be over at least for the next few years. The blame, once again, goes to the overplay of politics.

A centralised, single-party rule has been the prime strength of China in the early decades of growth.

Now it has become their liability, so much so that an over-ambitious ruler can keep the country under extended lockdown to fulfil his insane ‘zero Covid’ objectives, ignoring economic and social costs.

In the absence of political checks and balances, Chinese President Xi Jinping went on a spending spree around the world in the name of the Belt and Road Initiative (BRI), over the last decade.

Now that one after another country is going bankrupt, the heat is building up on the Chinese economy.

What made the situation particularly worse is the failure to reform the domestic economy. The results are now showing.

From blackouts to failure to arrest faltering growth and a collapsing property sector — the Chinese economy is developing widespread cracks, triggering citizen protests.

From agitation against bank failures and mortgage strikes, the protests have lately become more direct. Banners popped up in a Beijing street — barely a week ahead of the crucial party congress where Xi sought a third term — demanding freedom from the iron rule.

This is exceptional.

China Became A Drag Force

In its latest forecast, the IMF projected the US to grow by 1 per cent in 2023, Eurozone by 0.5 per cent, Latin America by 1.7 per cent, Sub-Saharan Africa by 3.7 per cent, Mid-East and central Asia by 3.6 per cent and emerging and developing Asia by 4.9 per cent.

Emerging Asia is the only region that is expected to improve the growth tally substantially in 2023.

However, China’s contribution is pegged at 4 per cent — lower than the regional growth. Clearly, from a growth engine, China became a drag force to the regional economy.

The trend is evident in 2022 as well. Last month (September), the World Bank projected China to grow by a mere 2.8 per cent in 2022, that’s half of the 5.5 per cent growth promised by Beijing.

Moreover, for the first time in three decades, China’s growth would lag behind the rest of the Asia-Pacific region.

A 24-country estimate shows that without China, the Asia-Pacific region could have grown at a faster pace. The slowdown has been structural and many contemporary studies indicate that China would suffer low growth for years to come.

“We’ve been warning for years why we thought the consensus for ongoing, robust Chinese economic growth was wrong, and how the economy would be growing at just 2 per cent by the end of this decade,” Neil Shearing, chief economist of Capital Economics said in a 26 September note.

Interestingly, Capital Economics predicted a major slowdown in China at least two years ahead of the Covid outbreak. The pandemic helped consolidate the trend.

“Construction, a key engine of China’s growth and commodity demand, will slow substantially over the next few years, whether or not the economy escapes the current crunch unscathed,” chief Asia economist of the outfit, Marks Williams said in September 2021.

The link between property or real estate and economic growth is simple. Real estate accounts for 10 per cent of the workforce, 25 per cent of total fixed asset investment and 29 per cent of China’s GDP.

The impact is not limited to property. Low global demand reduced steel production 5.7 per cent during the first eight months of 2022. Profitability of steel sector is down by 20 per cent.

Retail sales inside China are following a declining trend as well. Auto sales slowed down in September.

India The New Growth Engine

Measured from these perspectives, the Indian scenario looks outstanding. There are surely problems. But there is no unrest. The government is stable and so is the economy.

Retail businesses reported a 21 per cent jump in September compared to the pre-Covid levels in 2019.

Electronic permits (E-way bills) for inter-state transfer of goods shot up to a record high in September, signalling robust festive buying.

Passenger vehicle sales scaled a record one million units in the September quarter, following the easing of the global semiconductor shortage.

Despite reducing global demand, IT giant Infosys reported better-than-expected profits in September.

IMF predicted India to grow by 6.8 per cent in 2022 and 6.1 per cent in 2023 (way above the average for emerging Asia) and become the third largest economy — after the USA and China — by the fiscal year 2027-28.

Every estimate suggests the global economy might enter a difficult phase next year. The task ahead for the Modi government is to maintain the reform agenda, ignoring temporary headwinds, so that India can make the best of the global turnaround as and when it will come.