Covid made a resurgence as China lifted restrictions after widespread protests. But the scale of its spread could affect post-pandemic recovery globally. Currencies have tumbled against the dollar as international capital flows reversed and globalisation has taken a knock with trade fragmenting while the world economy cools down. The biggest break from the past is for the world having to conduct its business with higher borrowing costs and lower asset prices. Credit flow is drying up when global indebtedness has peaked. Producers will be expected to pull out of a business downturn while governments struggle to regain fiscal balance, and, in some cases, trade balance.
Productivity-enhancing technology is facing a funding squeeze and is being subject to more intense antitrust scrutiny across markets. Banks are having to revalue credit risk as the era of cheap money draws to a close. Energy and supply chain resilience will continue to reprioritise countries’ strategic interests while globalisation transforms from being resource-led to being innovation-led. These structural changes may not be the most efficient – such as attempts at friendshoring – and will affect the world economy’s growth potential.
Some countries will be able to negotiate the new economic landscape better than others. India, on current evidence, appears to be one of them. Policy orientation over the previous decade places it in the Goldilocks zone. Its companies have deleveraged during a phase of bad loan clean-up and are capable of scaling up investments.
Indian banks have built strong capital buffers through consumer credit and are in a position to feed demand from industry when it materialises. Neither is RBI’s interest rate trajectory as steep as in advanced economies, nor has the rupee fallen as precipitously as hard currencies. Tax reforms are pushing up collections, making it easier for GoI to restore fiscal equilibrium. The size of its market offers India a cushion against slowing trade.
With resource endowments similar to those of China, it can exploit supply chain restructuring alongside its comparative advantage in information technology offshoring. New Delhi is cobbling together bilateral trade agreements to expand the market for manufacturing exports promoted through production incentives.
This is the year that India’s voice carried to a global audience. Financial markets reacted to the India story with a quick reversal of portfolio capital flows, keeping equity valuations aloft. New Delhi secured access to cheap energy from Moscow without antagonising traditional suppliers or the West.
India has middle-of-the-road fiscal and trade metrics among emerging economies after the pandemic and an oil shock. But it has class-leading growth. Policy continuity to sustain this will set it further apart. India is on course to build back better.