APR 11 -APR 17

Geopolitical tensions & macro headwinds – Where is the Indian economy headed?

Here’s a list of major bottlenecks and issues that economies across the world are facing right now:

• Persisting supply chain disruptions
• Increase in crude oil prices
• High inflation in the US and the Fed’s response
• Russia – Ukraine war
• Sri Lankan debt crisis
• China in another Covid spiral
• Crisis brewing in Pakistan

What does this mean for the Indian economy and its constituents? Lyman logic says that when an off-taker is hit with disruptions in his supply chain he finds a second source to meet his needs. This is what most of us expected when during Covid the world faced a massive shortage of semiconductors and chips due disruptions in China. We believed companies would shut shop and move to India. But except for a handful of companies who moved out of China, the world still relies on China for most of its semiconductor and chips supplies. People have realised it the hard way that it takes decades to rebuild a reliable supply chain. India needs to roll up its sleeves in this department to compete with the massive infrastructure that China has built up over the years. 

Similarly an increase in crude oil prices fuelled by a supply-demand imbalance and geopolitical risks are not going away in the near term. With the world’s economies back to chugging along after a 2 year Covid shutdown, demand has surged with supply not catching up. With India importing circa 85% of its oil, a report estimates that at an average crude oil price of 120 dollars a barrel, the Indian economy will be hit by an additional burden of 70 billion dollars in FY23 above the FY22 level. This additional burden would be circa 2% of GDP.

Geopolitical & economic uncertainties in the neighbourhood including Sri Lanka,  Pakistan and Bhutan pose both security and economic threats to India.

With the US economy picking up steam, inflation has reared its head and the Fed’s has started liquidity tightening measures. This is expected to check the flow of capital into India into both the public and private markets.

Net net, the picture is not pretty for the Indian economy. The Indian economy’s fundamentals are still intact and the basic structure of the economy(ie. based on consumption) is still capable of absorbing some shocks, but there are no real immediate solutions to the above geopolitical problems. Inflation is getting stronger by the day. The latest inflation numbers came in last week at a 17 month high of 6.95%. With RBI reversing its stance of ‘growth first, inflation later’ during the first week of April, experts believe that even with timely intervention, it will take at least 3-4 quarters for the inflation numbers to come down. Given this background, the World Bank has also cut India’s growth projections to 8% for FY23 from its earlier estimate of 8.7%. 

Despite the doom and gloom, Indian IT behemoths Infosys and TCS have disclosed remarkable growth this quarter and demand is rising in the steel, cement and auto sectors indicating a growth in economic activity. The Infrastructure sector has been attracting billion dollar investments and despite the global cribbing, India has been fearlessly buying oil from Russia at deep discounts. The Indian economy is as resilient as India’s citizens and we believe this pain will be short term with normalcy just around the corner.