Time To Recast The India Story, Underline Relative Merit

Shankkar Aiyar
8 min readAug 4, 2022


India is caught in a maelstrom of global uncertainty. It is better placed than many countries — but not immune to rising costs and falling global growth. It must restate financials and reset the eco-system to enable investments and growth.

Shankkar Aiyar | 07:48 AM IST, 01 Aug 2022

A confluence of events has propelled the world economy into an estuary of uncertainty. The trail of tectonic disruptions — the pandemic followed by Russia’s invasion of Ukraine — has upturned supply-demand equations and the accepted geo-political order.

As the aphorism goes, decades happened in weeks. The end of magic money signalled by the U.S. Federal Reserve last autumn morphed into the summer of despair as the war in Europe triggered a food and energy crisis. Price of coal doubled from $210 per tonne to $400-plus, crude oil shot up from $75/barrel to yo-yo between $100 and $125, and gas prices in Europe touched $ 350 an oil-equivalent barrel.

Consumer price inflation hovering at 40-year highs and above 9%-plus is five times target levels set by central banks in the United States, Canada, Europe and the United Kingdom. The dire circumstance, in the words of Agustin Carstens of the Bank of International Settlements, called for quick and decisive action. Unsurprisingly 30 countries have raced to hike rates. Analysis by Fitch ratings reveals that the rate hikes have been the fastest in three decades.

Tightening financial conditions typically trigger a flight of capital to safety, aka the U.S. dollar. As the U.S. dollar index rocketed from mid-nineties to over 108, other currencies slid like dominoes — the Yen slipped to 137 to the dollar, the Euro to parity. Thanks to the terms of trade and nature of engagement, currencies of emerging economies vulnerable to outflows and imported inflation slid in tandem.

India Story In A Maelstrom

The India Story is caught in a global maelstrom of rising costs and falling growth.

In February 2022 India’s economy, emerging from bruising encounters with the pandemic, spurred optimism. Budget sought to present a pathway to growth as the economy opened up. Advance estimates suggested India’s GDP grew 9.2% in 2021–22. The Economic Survey forecast growth in 2022–23 to be 8–8.5%. The Budget indicated a nominal GDP growth of 11.1% with an implied inflation forecast of around 3%.

Exports were booming and touched $418 billion for FY22. The fiscal deficit was to be brought down to 6.4% from 6.9 per cent, and higher than expected revenue collections put the target well within reach. The Rupee was at Rs 74.56 per US dollar and forex reserves were at a comfortable $629 billion. The yield on the 10-year government bond hovered around 6.02%.

By July 2022 the picture has warped. India’s dependence on imports shows up in inflation figures. WPI hovered around 15% for four months and CPI stayed well above the tolerance level of 6% for six months. The Reserve Bank of India raised repo rates and recast its inflation estimates for 2022–23 from 4.5% to 6.7%. The 10-year yield rose from 6.6% to 7.37%.

The greenback’s global strength, along with the rise in India’s imports and dollar outflows — foreign portfolio investors net sold over $ 30 billion between January and July — led to the rupee tumbling to Rs 80 for a dollar. Foreign currency assets with the RBI slid from $569 billion end of January to $511 billion in mid-July as the RBI intervened to cap currency volatility.

The surge in prices pushed the cost of government intervention up by over Rs 3 lakh crore. Fertiliser subsidies were hiked to record levels. Food subsidies went up from Rs 2.07 lakh crore to Rs 2.87 lakh crore. The possibility of an extension of the PM Garib Kalyan Anna Yojana from September to March set off alarms in the Department of Expenditure. Indeed, the picture of rising fuel subsidies is evolving and depends on crude oil prices.

India once again faces the challenges of managing twin deficits — a widening fiscal deficit and an expanded current account deficit. In July 2022, the GDP growth forecast stands trimmed — the RBI lowered its forecast from 7.8% to 7.2%, the World Bank from 8% to 7.5%.

In less than six months, the core assumptions scaffolding Budget 2022 are unravelling.

The Spectre of Perils

The cup of woes continues to spill over as cascading effect of cause over consequence is playing out. On Tuesday, the July edition of the IMF Outlook ominously titled Gloomy and More Uncertain observed, “The world may soon be teetering on the edge of a global recession, only two years after the last one.” The IMF places global growth at 3.2% nearly half of 6.1% in 2021. The trimming of growth follows warnings of stagflation by the World Bank and deceleration by the OECD.

On Wednesday the U.S. Fed hiked rates by 75 basis points — the second time in as many meetings — and is on course for more hikes. Indeed, chair Jerome Powell went on to say “another unusually large increase could be appropriate at our next meeting” depending on the data flowing in by September.

On Thursday, the U.S. economy shrank for a second successive quarter triggering fears of a steep decline in demand for goods and services from emerging and developing economies. What is most telling is that the Fed, like the European Central Bank, did not issue forward guidance.

The ‘whatever it takes’ approach of central banks is already visible. American tech companies are unveiling layoffs, low-cost diners are reporting a fall in footfalls and retailers are issuing profit warnings. In Europe and the U.K. higher energy costs have driven retail sales and retail stocks lower. In China, the world’s second-largest economy, Apple is offering a rare discount on its iPhone models and accessories. The parade of perils renders even the familiar uncertain.

Time To Recast The India Story

It is true that India has fared better and is better placed than many developing economies. Equally the picture is not all sunshine and roses. In a signed blog, IMF Chief Kristalina Georgieva said rather bluntly “it is going to be a tough 2022 — and possibly an even tougher 2023, with increased risk of recession.”

The Fed estimates it will raise rates to 3.5% by December and more in 2023 and all bets are off on when and at what level the hikes will pause. What happens in the United States does not stay in the United States — the latest Moody’s Analytics emerging market view is titled say goodbye to low inflation Asia. The Reserve Bank of India does not have the luxury of pausing at 5.5% if rates elsewhere continue to rise.

The RBI will have to follow suit to protect the currency. The risks are eloquently presented in a recent RBI paper which states that portfolio outflows could touch 3.2% of GDP ($100 billion) in a year in an adverse scenario and 7.7% of GDP in a black swan event year. The key to sustainability is growth and credible interest rate differential.

The cost of money is critical for growth. India’s general government deficit (centre and states) hovers around 9.5%. Its debt to GDP ratio is 86.5% — it worsens if unattended costs like the losses of state electricity boards are factored. Rising interest rates impact the servicing of debt and efforts to raise resources. As Olivier Blanchard postulated, sustainability of debt rests on the cost of servicing it being lower than the rate of nominal growth.

The global challenges afford India a serendipitous opportunity to leverage the scale of its domestic market and investible skilled manpower — it is also useful to remind audiences that China is forecast to grow at barely 3.3%.

To start with, the government must review Budget 2022 and recast the macro fundamentals, presenting a credible picture of its expenditure and the potential for resources. This calls for a time-bound glide path on privatisation of public sector banks and other state-owned enterprises, for the monetisation of assets.

Energy is critical for fuelling growth — and beyond cleaning up the balance sheets of state electricity boards, there is a need for a plan to transition the economy to domestic green energy and contain imported inflation. Rising imports of goods call for mapping of what India can produce competitively using incentives such as performance-linked incentive schemes.

The pandemic and the war on Ukraine have awakened the world to the perils of a global supply chain that is simply a Chinese supply chain. The developed world is looking for what Janet Yellen calls ‘friend-shoring’ of supply chains. India can present itself as both a consumer and producer of goods and services.

This will require accelerated implementation of long pending legislative and regulatory reforms for factors of productivity — in ease of doing business, collaborative framing of rules, the institution of new labour codes across states and making land available.

The bulk of these reforms are located in the domain of states — perhaps the BJP which is in power in 18 states can create the demonstration effect. Yes, there has been some movement — like the recent conference of chief secretaries and department heads for ease of living — but these must be regular and need follow-ups. MSMEs will be the backbone of any supply chain. Using the burgeoning fin-techs and the start-up eco-system will enhance access to credit and expertise.

India assumes the presidency of the Group of 20 this year — the occasion presents an opportunity for India to capitalise on the attention. It is not enough for India to declare that it will be a $30 trillion economy. It needs to present a credible perspective plan of what, how, and when to the world of investors, economists, rating agencies and influencers. The essence of the relative merit of the India Story must be re-stated and underlined through data and persuasive narratives.

The question India must pose investors is whether they can afford to not be a part of the fastest-growing free market democracy!

Shankkar Aiyar, political-economy analyst, is the author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at shankkar.aiyar@gmail.com and follow him on Twitter. This column was first published here. Previous columns can be found at Thought Capital.



Shankkar Aiyar

Journalist-Analyst. Author of ‘Accidental India, ‘Áadhaar: A Biometric History’ and ‘The Gated Republic’. Studying how politics rules the economics of people!