Successful macroeconomic management of the Covid-19 pandemic has led to a strong recovery in the Indian economy, says Nada Choueiri
Successful macroeconomic management of the Covid-19 pandemic has led to a strong recovery in the Indian economy, says Nada Choueiri
Successful macroeconomic management of the Covid-19 pandemic has led to a strong recovery in India’s economy, putting the country in a better position to deal with the economic fallout from the current Ukraine crisis, a senior International Monetary Fund official said.
Noting that India accounts for about seven percent of the total global economy in Purchasing Power Parity (PPP) terms and is one of the countries growing rapidly, Nada Choueiri, Head of the IMF Mission to India, said that India’s growth boosts the global economy and does very important for a well-functioning global economy.
Manufacturers of vaccines
“You are making an important contribution here. The other major role that India is playing today is to provide vaccines,” she said on Wednesday.
As a major vaccine producer, India also has a role to play in managing future pandemics, she said.
“Macroeconomic management of the pandemic has fueled a strong recovery, although the recovery remains incomplete. So India is in a much better position today to deal with the Ukraine shock crisis than it was at the time of the taper tantrum. But the world economy is in a very difficult situation today because of the shocks,” Ms Choueiri said.
Giving her impression of the performance of the Indian economy during this global economic crisis starting with the Covid-19 pandemic, she said India has taken important measures across a spectrum of policies.
“We saw sound budgetary management to get things right, create fiscal space and respond to the immediate needs of the population. We also saw proactive monetary policy to respond to the needs of the financial system and the corporate sector and to meet liquidity needs during the pandemic,” she said.
In its most recent World Economic Outlook, the IMF lowered its forecast for 2022 to 8.2 percent (a fall of 0.8 percentage points) from a previous 9 percent growth for 2022.
Ukraine crisis
Ms. Choueiri explained that this was mainly due to the war in Ukraine.
“About 0.6 percentage points of this is due to the war in Ukraine and the impact on the Indian economy. There are several channels that we can consider. The first and most immediate channel is, of course, oil and other commodity prices. We’ve seen these spike and we expect them to stay high for a long period of time,” she said, noting that this is having an impact on real incomes and hence domestic demand, which is dampening growth become.
The IMF official said the other channel is foreign demand, which is a global economic slowdown due to the war in Ukraine, particularly in Europe, a key trading partner of India.
“We expect this to reflect lower external demand for Indian exports. So exports will grow more slowly than we expected in January,” she said, explaining the reasons behind the 0.6 percent drop in India’s GDP growth forecasts this year due to the war in Ukraine.
Another 0.2 percentage point drop is due to base effects, she said.
“Because we updated our database. Compared to January we have Q4 data releases and some historical data that has been updated. So these are base effects that translate into 0.2 percent lower growth. So we went from nine to 8.8 because of these base effects. And then we went up to 8.2 because of Ukraine, so 0.6 percentage points lower,” she noted.
Ms Choueiri said India is on a recovery path from the economic fallout from the pandemic. There was a very sharp recession in fiscal 2021, with GDP falling by 6.6 percent. And there was a strong rebound from that last year. The growth estimate for the past year is 8.9 percent.
“This is a strong upswing. And that despite a very violent second wave that took place in the first quarter of the past financial year. Despite this, we see that there has been a strong recovery over the past year and the recovery is still ongoing,” she said.
According to the latest forecasts, India’s growth will slow to 6.9 percent next year and stay at around 7 percent for the next several years.
In response to a question about the challenges facing the Indian economy, Choueiri put the war in Ukraine at the top of the list.
“The risks are that this war is still protracted and the solution is further away. And so economic dislocations and disruptions to supply chains and commodity markets will be even more severe than we anticipate. So that’s a big risk to worry about. “Of course, another risk we are concerned about is still the pandemic. We’re not out of the pandemic yet,” she said.
Beware of COVID-19
India is now among the most vaccinated countries in the world. But the risk of new variants that can resist the vaccines still exists. And that’s something we need to watch out for, she said.
“The third biggest risk is a shift in global financial conditions,” IMF chief India said. Today, inflation is a major concern in many advanced economies in Europe and the US, and there is a sense that monetary policy may need to be tightened faster than markets anticipated.
“So if there is a significant change in monetary policy beyond what the market expects to tame these inflationary pressures, it could lead to an abrupt change in global financial conditions, which could have a negative impact on India,” she said.
Ms Choueiri said that compared to other countries during the pandemic, India has been able to make sensible use of the policy space it had.
“We have seen the authorities take a strong fiscal, monetary and financial response to provide liquidity support to MSMEs and businesses to provide support to protect poor households through transfers in kind and cash; to support rural employment programs,” she said.
Above all, according to Ms. Choueiri, the tax administration got some things right, for example the increase in the mineral oil tax at the beginning of the pandemic, when prices fell significantly, to create fiscal space.
“This added fiscal space has helped India provide the support it has provided during the pandemic,” she said.
“So we think India has done pretty well in terms of macro management of the economic crisis and has been able to use the policy space it had to provide support,” she said, adding that it was a similar feat in monetary policy space as well.
currency reserves
Ms Choueiri noted that a number of challenges come on top of the pandemic crisis in relation to the Ukraine war, assuring that a number of strengths will help India overcome this shock.
“First, in the external sector, we see that the central bank has a significant amount of foreign exchange reserves that would help weather adverse shocks to global financial conditions,” she said.
At the level of food supply that is threatening the global economy, particularly in emerging and developing countries, India has strong production of staple foods that would help shield it from this food crisis, she assured.
“So the Ukraine shock is still dissipating. And we need to see what the concrete actions will be to address this, but so far we see that (India) has the right tools to deal with this crisis,” she said.
The head of IMF India said that on the fiscal side, given the shock in oil and food prices, India might consider getting additional support for those directly affected, in the form of additional direct transfers in kind or cash transfers to the most vulnerable population .
Ms Choueiri said monetary policymakers need to keep an eye on the second-round effects and communicate how they view the second-round effects and what measures are being taken to contain them and prevent persistently high inflation in India.
