Impact of Domestic and Global Shocks on the Indian Economy
The Indian economy has faced numerous domestic and global shocks at the start of the current decade, significantly impacting its Gross Domestic Product (GDP) growth trajectory.
West Asia Crisis
- The West Asia crisis has primarily manifested as a supply shock, affecting energy output, availability, and prices, due to India's high import dependence.
- High-frequency indicators suggest domestic demand remains stable across various sectors.
COVID-19 Pandemic Impact
- The pandemic caused simultaneous demand and supply shocks, leading to a notable GDP slump in FY21.
- Lockdowns affected consumption, especially in the services sector, and business closures shrank output.
- Manufacturing faced challenges with closed plants and disrupted supply chains.
- Permanent loss in output was noted in skipped services like physiotherapy and personal care.
Supply Shock Implications
- The duration of the West Asia conflict-related supply shock is critical for India's macroeconomic outcomes.
- Prolonged shocks could lead to lower incomes and a demand shock, resulting in stagflationary outcomes.
Economic Projections
- ICRA revised GDP growth forecast to 6.5% from 7.1%, assuming crude oil prices average at $85/barrel in FY27.
- Consumer Price Index (CPI)-based inflation is projected to rise to 4.5% from 4%.
Government's Response and Fiscal Risks
- Initial government response included cutting excise duty on fuel to shield consumers from rising energy prices.
- Long-term sustained high energy prices may necessitate raising fuel prices, impacting fiscal and inflation outcomes.
Macroeconomic Differences
- During the pandemic, interest rates fell to ultra-low levels, aiding weak demand, contrasting with current higher yields due to fiscal risks.
Balance of Payments Outlook
- The current account deficit is expected to reach a four-year high of 1.7% of GDP in FY27, indicating a savings-investment gap.
- Subdued capital inflows may lead to a liquidity deficit, unlike the surplus during the pandemic.
The author is the chief economist and head of research and outreach at ICRA. The views expressed are personal and do not reflect the opinions of Business Standard.
