By Guneet Sahni
Four years following the onset of the global pandemic, the world economy continues to grapple with fragility and uncertainty. The pandemic laid bare and exacerbated the inherent weaknesses of an interconnected global economy, now showing signs of fragmentation into competing blocs. Against the backdrop of the Russia-Ukraine conflict, the Hamas-Israel War, increased greening pressure, and the ascent of middle-power nations, the established international order faces challenges from both advocates of the 'rules-based international order' and those deeming it obsolete. Amidst these dynamics, the political landscape in India is set to witness a pivotal moment in the summer of 2024, as Prime Minister Narendra Modi seeks a third term in office. The outcome of the elections will not only shape the future of the world's largest democracy but also have far-reaching implications on geopolitics, global business, and society. Coupled with the global development scenario, significant changes are anticipated, including shifts in global trade dynamics, challenges posed by inflation, and the impact of China's economic slowdown. This essay seeks to delve into the intricate dynamics of the global development landscape and its consequential impact on the anticipated growth trajectory of 2024 post-election India.
In the evolving global development landscape of 2024, a central concern remains the pervasive challenge of inflation. Projections indicate that the inflation rate is poised to fluctuate worldwide, influenced by the distinct economic conditions, policy responses, and external shocks experienced by different countries and regions. The International Monetary Fund (IMF) forecasts a global inflation rate of 5.8% for 2024, with a delayed return of core inflation to the target levels of approximately 2% anticipated by 2025[1]. The ramifications of the inflation dynamics in 2024 extend far and wide within the global economy. They will impact exchange rates, interest rates, asset valuations, income distribution, and the debt sustainability of numerous countries and regions. This complex scenario presents both challenges and opportunities for businesses and professionals, necessitating adept adjustments to changing price levels and expectations while effectively managing associated risks and uncertainties.
Compounding this economic landscape is the deceleration of China, the world's second-largest economy and a principal trading partner for many nations. Having served as the primary engine of global growth for the past four decades, China's growth model, reliant on investment, exports, and debt, appears to have encountered limitations[2]. Presently, China confronts multiple challenges, including an aging population, elevated youth unemployment, declining productivity, and crises in both the environmental and real estate sectors. The repercussions of China's slowdown will reverberate into foreign policy and other critical domains, with the extent of its impact contingent upon the responses formulated by the Chinese government to address these challenges.
On the flip, India's economic outlook is poised for positive growth, with projections indicating a trajectory of 6.5 percent in the fiscal year 2024-25, surging to 7 percent in 2026, as per the latest assessments by S&P Global.[3] The third-quarter data ending in September revealed a robust year-on-year expansion of 7.6 percent, positioning India as an attractive destination for foreign investments, expected to outpace China's growth forecast of less than 5 percent in 2024.[4]Conservative estimates from the IMF suggest that India is on course to become the world's third-largest economy by 2027, surpassing Japan and Germany, boasting a GDP exceeding US$5 trillion.[5] The foundation of India's robust economic trajectory lies in resilient growth and favorable demographics. As the world's most populous country with a median age of 28.2 years, India is poised for recovery in domestic demand, especially in private consumption and household spending, post the prolonged pandemic.[6] This sets the stage for business expansion plans, fueled by India's substantial consumer base, rising urban incomes, and the ambitions of the largest young population globally.
With the pivotal Indian general elections on the horizon for the summer of 2024, Goldman Sachs Research anticipates a transformative shift in the drivers of economic growth midway through the year. As the election approaches, consumption growth is projected to be fueled by subsidies and transfer payments, evident in increased allocations to rural employment programs, augmented cooking gas subsidies, and an extended food subsidy program.[7] Post-election, despite a slowdown in government capital expenditure, Goldman Sachs Research expects a boost in private investment. Indian companies are well-prepared for this transition, boasting well-capitalized bank balance sheets, deleveraged manufacturing balance sheets, and benefiting from a favourable "China-plus-one" tailwind.[8]
Positioned within the narrative of India's 2023 growth trajectory, headline inflation, while exhibiting volatility, has generally moderated. Employment has surpassed pre-pandemic levels, with formalization progressing alongside the continued dominance of the informal sector[9]. The financial sector remains resilient, experiencing its strongest performance in several years, resilient to global financial stress in early 2023. Despite the widening current account deficit in FY2022/23, driven by post-pandemic domestic demand recovery and transitory external shocks, the impact is offset by robust services exports and proactive diversification of critical oil imports[10]. While the budget deficit has eased, elevated public debt necessitates the rebuilding of fiscal buffers[11]. India's 2023 G20 presidency highlights its pivotal role in advancing multilateral policy priorities globally.
IMF anticipates a sustained Indian growth, macroeconomic and financial stability. It praises India's effective macroeconomic policies and reforms, contributing to a resilient and stable economy amid global challenges, commending the near-term fiscal policy focusing on capital spending acceleration while also recommending ambitious consolidation efforts to address elevated public debt levels by enhancing revenue mobilization, improving spending efficiency, and establishing a transparent fiscal framework aligned with India's development goals.[12]
Although headline inflation is expected to gradually decrease, food price shocks contribute to its volatility. The current account deficit is anticipated to improve to 1.8 percent of GDP in FY2023/24, driven by resilient services exports and lower oil import costs.[13] Future growth is sustained by India's digital public infrastructure and a robust government infrastructure program. With potential for higher growth, comprehensive reforms could enhance contributions from labour and human capital.
Balanced risks surround the outlook. A global growth slowdown could impact India through trade and financial channels, while ongoing global supply disruptions may heighten commodity price volatility, increasing fiscal pressures. Domestically, weather shocks could reignite inflationary pressures and prompt food export restrictions. Conversely, stronger-than-expected consumer demand and private investment could elevate growth. Further liberalization of foreign investment and labor market reforms could amplify India's role in global value chains, fostering increased exports and economic expansion.[14]
Hence, IMF encourages continued comprehensive structural reforms for job-rich, inclusive, and sustainable growth. Priorities include improving the labor market, increasing female labor force participation, and advancing health, education, land, and agricultural reforms. Strengthening governance and regulatory frameworks are highlighted for enhanced transparency and public accountability. Progress in designing and implementing climate policies is deemed crucial for meeting India's net zero emissions target.
As India stands at the crossroads of geopolitical, economic, and political transformations in 2024, the intertwined factors of inflation, China's economic deceleration, the ongoing wars, and the repeated need for diversifying supply chains shape a complex global environment. Against this backdrop, India's growth, highlighted by robust economic indicators, a promising outlook, and impending elections, underscores its pivotal role on the world stage. The interplay of these elements sets the stage for a dynamic future, where India's decisions and developments will echo far beyond its borders, influencing the trajectory of global affairs, trade dynamics, and international relations.
References
[1] Bryce Engelland, “Geopolitical & Economic Outlook 2024: Democracy and the Splintering Economy,” Thomson Reuters Institute, December 18, 2023, https://www.thomsonreuters.com/en-us/posts/global-economy/geopolitical-economic-outlook-2024-democracy-economy/.
[2] Ibid
[3] Melissa Cyrill, “India’s Outlook for 2024-25: Key Growth Areas and Investment Prospects,” India Briefing News, December 1, 2023, https://www.india-briefing.com/news/indias-outlook-for-2024-25-growth-and-investment-prospects-30386.html/.
[4] Ibid
[5] Ibid
[6] Ibid
[7] “India’s Election-Year Economy Will Likely Be a Tale of Two Halves,” Goldman Sachs, December 21, 2023, https://www.goldmansachs.com/intelligence/pages/indias-election-year-economy-will-likely-be-a-tale-of-two-halves.html.
[8] Ibid
[9] “IMF Executive Board Concludes 2023 Article IV Consultation with India,” IMF, December 18, 2023, https://www.imf.org/en/News/Articles/2023/12/18/pr23458-india-imf-exec-board-concludes-2023-art-iv-consult.
[10] Ibid
[11] Ibid
[12] Ibid
[13] Ibid
[14] Ibid
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