A Tough Road Ahead for India’s Economy in 2023

The general elections in India, scheduled for 2024, will also bring high-pitched rhetoric and spin-doctoring, further muddying the waters. In short, brace yourself for a flurry of contradictory signals and a bumpy ride over the next 12 months. A look ahead to the Indian economy in 2023.

The global situation is tumultuous

  • Pandemic plus Ukraine war: One conflicting signal, the seemingly doomed future of globalisation, is already in front of us. There are numerous signs of globalisation retrenchment following Brexit, the covid pandemic, and the Russia-Ukraine conflict.
  • Supply chain collapse: The collapse of global supply chains as a result of economic lockdowns has refocused attention on near-shoring or on-shoring.
  • Trade barriers: In a related move, nations have erected protective trade barriers; both the United States and the European Union are using climate plans to break free-trade promises. As a result, global trade has been reduced.

What are the international institute’s prospects?

  • The BlackRock Investment Institute’s Global Outlook for 2023: Various financial institutions around the world are struggling to comprehend the phenomenon. “We see geopolitical cooperation and globalisation evolving into a fragmented world with competing blocs,” according to the BlackRock Investment Institute’s 2023 Global Outlook.
  • Citi’s wealth forecast for 2023: Citi’s wealth outlook for 2023 was ominous, citing the challenges that a less globalised, more polarised world presents for investors.

Globalization’s impact and policy changes in developed economies

  • Rising federal rates: As US employment and demand data remain elevated (despite, paradoxically, slowing growth), the Federal Reserve is likely to be unyielding in its pursuit of a 2% inflation rate.
  • Domestic interest rates will likely rise as a result of the Fed’s actions, forcing many central banks around the world to raise interest rates in tandem. Surprisingly, central banks in emerging economies today face threats to their independence from an external agency rather than from domestic political regimes.
  • Food and fuel price increases: Inflation travels easily across national borders, particularly through food and fuel trade. Because of shattered supply chains and war in Europe, inflation’s negative impact may last until 2023.
  • The Omicron variant and travel restrictions: Another unintended consequence of globalisation could be the persistence of the Omicron variant, which has travelled seamlessly from one end of the world to the other. The Indian government has been forced to resume random screening of passengers arriving from all over the world in order to test for the numerous Omicron variants that have recently resurfaced.

The Economic Impact on India

  • Overpriced equity markets: Since early 2020, when the initial shock of the covid pandemic had passed, Indian equity markets have been soaring. Cross-country comparisons of various valuation indices across emerging markets show that the Indian market is currently significantly overpriced, both in relation to its own past performance and in comparison to the rest of the world.
  • High retail investors: Surprisingly, the market held its own despite foreign portfolio investors (FPI) withdrawing funds in recent months. The market’s valuation is thought to have been maintained by domestic investment institutions and retail investors. But beneath this cheerful exterior is a bleak reality.
  • Worrying credit histories: According to Reserve Bank of India (RBI) sectoral credit deployment data, credit growth in commercial banks in recent months has been driven by only two segments: non-bank financial companies (NBFCs) and consumer loans.
  • Given the sluggish industrial credit demand, a large portion of the NBFC borrowing was also for on-lending to retail borrowers. According to RBI data for commercial banks, consumer loans in four categories grew by nearly 71% between April 2020 and November 2022: advances against fixed deposits, advances against shares or bonds, loans against gold jewellery, and other personal loans.
  • Loans for equity investments: It is very likely that a large proportion of these loans have found their way into stock markets; the Nifty-50 index gained nearly 118% between April 2020 and November 2022, while FPI investments saw a net inflow of only 1,464 crore during the same period.

@the end

The year 2023 appears to be extremely difficult for the economy in general, and credit growth and recovery in particular. Retail investors must be protected from Ponzi schemes and false promises of guaranteed returns by SEBI and the RBI.

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