We have choices in every aspect of life and what we choose is up to us. The choices we make mold us. If we see danger, we will be on the back foot, and if we see an opportunity, we work towards making the most of it. Today, economies around the world are being reset due to inflation caused by geopolitical unrest and the actions taken by some of the most powerful countries in dealing with their economies. The impact of his decisions can be felt across the world.
If we look at what has happened in the last 15 years, every adversity was also an opportunity. With the benefit of foresight, we can all discuss how it would have been prudent to seize those opportunities, but fear and noise keep most of us from making rational decisions. So it would help if we can cancel out some of the noise in the current scenario, be it about the recent depreciation of the Indian currency, high inflation or low growth.
The rupee has depreciated against the US dollar, but that is not the whole picture: the trade happened when our currency was at 50 against the dollar, and the trade also takes place at current levels. More than the absolute value of a currency, its stability matters. There is no adverse effect of slow and steady appreciation or depreciation. By now, everyone knows that as soon as the US Federal Reserve decided to raise interest rates, the fund funnel turned to the US, and this change in global flows strengthened the dollar. One thing to note, however, is that not all currencies react in the same way. In fact, the Indian rupee has devalued against the dollar, but has gained against other major currencies. And we are not alone; Some other Asian currencies have also performed well.
This outperformance of our rupee is despite the fact that we are a net importer of oil, leading to trade deficit. Even on the trade deficit front, the absolute numbers may seem worrying, but as a percentage of total trade, the gap is far from alarming levels. Our foreign exchange reserves as a ratio of Gross Domestic Product (GDP) also make our currency one of the stronger ones other than the dollar which is under consideration. The current demand for the dollar is more of a realignment and is not driven by a long-term economic outlook.
Inflation is high but not structural in nature: beyond a point, inflation hurts everyone. High inflation has gripped all economies as it is cost-push inflation. Any student of economics will support the idea that raising interest rates is not the only solution to reducing inflation caused by a lack of supply. The Reserve Bank of India (RBI) has swallowed all criticism of being behind the curve in the first quarter of 2022, but we believe it was prudent not to increase policy rates continuously in an inflationary environment, which is fueled by demand. was not inspired. RBI took the right step by assessing the global situation and adopting a reactive approach.
The government has also played an important role in managing domestic inflation by taking various measures especially in the oil sector. Its reduction in excise duty on fuel was a major relief from the short-term perspective, while its policy on ethanol blending would help from the medium-term perspective as well. Raising export duties on some basic goods was another attempt to manage their prices, despite these being linked globally. Various ongoing programs under the Pradhan Mantri Awas Yojana are also contributing to easing inflationary pressures at the bottom of the pyramid.
While it is too early to make a clear assessment, this joint effort by the RBI and the government, coupled with some easing in commodity prices, has seen a moderation in inflation and is now looking stable around 7%. This is a far better scenario than in the US, where inflation is hovering around 9% and the Fed is in the dilemma of raising interest rates further at the cost of inducing a recession.
India’s economy is on a high growth launch pad: The biggest boost to growth comes from private investment in the form of capacity expansion. The current range of 70-75% capacity utilization is now pushing Corporate India to set up new capacities. At present, the corporate balance sheet has not been adequately leveraged, indicating the potential for meaningful capacity expansion in the coming years. The country’s banking system is adequately capitalized for lending and the quality of books is far better than in the pre-Covid era. Credit offtake data also shows that lending is increasing rapidly.
In such a period, there may be a boom in government finances, leading to an increase in its fiscal deficit. However, strong GST collection, be it on account of increased or increased tax collection efficiency, provides us with much needed comfort. Once our inflationary concerns subside, a small push for growth by the government will create a cascading effect that should take our economy on a higher growth trajectory.
The entire world is passing through challenging times, with inflation, low growth and geopolitical issues to deal with, the fear of Covid still persists. We cannot separate ourselves from these worries. But in all challenging times, great opportunities arise. We believe that India is today fully prepared to ride the multi-year trend of high growth.
Rashmi Saluja is the Executive Chairman of Religare Enterprises Limited.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.