Global slowdown may hurt exports, but domestic steam will power economy: Union finance ministry

India’s goods exports declined for the first time since February 2021 in October and the Finance Ministry said that the slowdown in China has also affected global trade. file | Photo Credit: Reuters

A global slowdown driven by a confluence of extremely high inflation, rising borrowing costs and geopolitical tensions may impact the outlook for India’s exports, but ‘resilient’ domestic demand and a ‘re-energized’ investment cycle should further spark and grow the economy. Will increase The Finance Ministry said on Thursday that there will be a boom in jobs in the coming months.

Arguing that the recent inflationary pressures have been driven more by local factors, including higher food prices, than by imported factors, the ministry asserted that those pressures are being mitigated by easing international commodity prices and the arrival of the kharif crop. It is decided to reduce it as well. India’s retail inflation has been over 7% in all but two months since April 2022, and stood at 6.8% in October.

Finance Minister Nirmala Sitharaman chaired her fifth pre-Budget 2023 consultation with experts from services and trade, in New Delhi on November 24, 2022.  Photo: Twitter/@FinMinIndia Via PTI

Finance Minister Nirmala Sitharaman chaired her fifth pre-Budget 2023 consultation with experts from services and trade, in New Delhi on November 24, 2022. Photo: Twitter/@FinMinIndia Via PTI

The Finance Ministry’s monthly review of the economy for October also emphasized that demand under the rural employment guarantee scheme (MNREGA) fell to its lowest level this year last month, adding that September and October Sharp rise in tractor sales in India reflects ‘better sentiments’. and expected increase in crop area sown’.

“A sharp deterioration in global growth prospects, high inflation, and deteriorating financial conditions have raised fears of an imminent global recession,” the review said, adding that the ‘spillovers’ of this slowdown ‘undermined the outlook for India’s export business’. can do’.

recession in china

India’s merchandise exports shrank in October for the first time since February 2021, and the ministry said the slowdown in China had also hit global trade, ‘exacerbating the impact of higher inflation and borrowing costs’. “China’s exports contracted in October 2022, for the first time since May 2020, as local restrictions and lower global demand hit the country’s trade,” it reported.

Regarding India’s growth prospects, the ministry said, “…however, a re-energized investment cycle with resilient domestic demand, strengthened financial system and structural reforms will provide an impetus to economic growth.”

“Hiring by firms is likely to improve new business profits in the coming quarters as firms continue to benefit from the lifting of COVID-19 restrictions and maintain the sales momentum seen during the festive season,” estimated the review. Is.

“Demand for work under MGNREGA has been declining since May 2022 and was the lowest in October since the beginning of the current financial year, indicating a decline in the unemployment rate in rural areas and an increase in employment in agriculture and non-agriculture sectors . activities stemming from the normalization of the rural economy and stabilization in the rural job market,” the ministry highlighted.

The recent financial turmoil at crypto exchanges and associated intermediaries, the review noted, is ‘a reminder of the unknown unknown’, even as the global economy continues to navigate turbulence with persistent macroeconomic uncertainty .

Rising risk of stagflation

“Despite significant increases in policy rates and quantitative tightening measures adopted by central banks around the world, inflationary pressures remain very high. In turn, these factors have led to a number of declines in global output, the level of economic activity is gradually declining and recession risks are rising,” it pointed out.

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While higher interest rates could drive economies into recession if central banks stay on their course, higher borrowing costs could expose faults in their financial systems which would further exacerbate global macroeconomic stress, the ministry warned. .

It acknowledged that the effects of rising borrowing costs and extremely high inflation are beginning to be reflected in several key indicators of global economic activity.

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Sovereign bond yields in advanced economies have also risen this year due to rising interest rates, while yields in emerging market economies have remained largely stable during this period.

“In the case of India, this led to lower risk premiums with the spread between the US 10-year yield and India’s 10-year yield falling by 478 basis points (bps) to 331 bps between January and October 2022,” the ministry said. translated.” Told. One basis point is equal to 0.01%.