Introduction The global economy has been significantly impacted by two major global shocks in the new millennium: the 2007-08 financial crisis and the Covid-19 pandemic. The financial crisis supported global economic growth, reaching 4.5% in 2010, but the Covid-19 pandemic led to a negative 3.8% growth in 2020. Inflation rates rose to multi-decade highs, fueled by global commodity and food price spikes. The Russia-Ukraine conflict further amplified the situation. To address this, monetary authorities in advanced economies, particularly the US Federal Reserve, are accelerating monetary policy normalization. This has led to volatile interest rates and prices of risk assets, causing uncertainty about the economic and policy outlook. The International Monetary Fund predicts global growth to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023.
Trade Helping India Reap the Benefits of Globalised World
Trade is crucial for developing countries to benefit from globalization and sustainable development. Global trade openness has increased, with India's share of trade increasing from 40% to 50% since 2005, reaching 46% in 2021 and 50% in 2022. 1. Global Trade Landscape: Emphasizes the significance of trade for developing countries in a globalized world. Trade is viewed as a means for balanced, equitable, and sustainable development.
2. Global Trade Trends:
Global trade showed resilience in H1 2022 but faced challenges in H2 2022.
Factors affecting global trade include a potential recession, monetary policy changes, and supply chain disruptions. Projections suggest a slowdown in global trade in H2 2022 and subdued growth in 2023.
3. India's Trade Performance:
India's trade openness, measured by trade as a percentage of GDP, has steadily
increased. Merchandise exports reached an all-time high in FY22 but faced moderation in growth in 2022. Notable growth in sectors like pharmaceuticals, electronics, engineering goods, and chemicals.
4. Trade in Services:
India maintained dominance in world services trade in FY22, with services exports growing significantly. Services imports also rose, influenced by transport, travel, and other business services.
5. Foreign Trade Policy:
India's Foreign Trade Policy focuses on providing a framework for exports and imports, offering incentives, and promoting diversification. Recent FTAs with UAE and Australia aim to enhance market access and competitiveness.
6. International Trade Settlement in Indian Rupees:
RBI introduced a framework for international trade settlement in Indian Rupees to
promote global trade and reduce currency risk. Aims to position the INR as an international currency.
7. Initiatives to Enhance Trade:
Various government schemes support export growth, including focus on agricultural
products, interest equalization, and remission of duties. Initiatives like Krishi Udan and Trade Infrastructure for Export Scheme aim to facilitate and incentivize exports.
8. India's Global Trade Engagements:
India engages in FTAs and PTAs to diversify exports, gain market access, and pursue geopolitical strategies. Concluded agreements with UAE and Australia, with ongoing negotiations and reviews of existing FTAs.
Balance of Payments in Challenging Times
India's external sector faces challenges with a widening Current Account Deficit (CAD) of US$36.4 billion (4.4% of GDP) in Q2FY23, attributed to a higher merchandise trade deficit and increased net investment income outgo. However, the CAD remains modest. Net services receipts rose to US$65.5 billion in H1FY23, driven by computer and business services, while remittances increased to US$48.0 billion. Foreign investment, a major capital component, saw net FDI inflows at US$20.0 billion. Adverse global conditions, including the Russia-Ukraine conflict and US Fed policy tightening, led to FPI outflows, impacting India's Balance of Payments and foreign exchange reserves, which stood at US$562.7 billion.
Exchange Rates Moving in Tandem with Global Developments
INR depreciated by 8.3% against the US dollar, attributed to the latter's 4.4% appreciation in the US dollar index during the same period. On a calendar-year basis, INR depreciated by 10.8%, contrasting with a 6.4% appreciation of the US dollar. The Nominal Effective Exchange Rate (NEER) of the US dollar rose by 7.8%, while India's NEER depreciated by 4.8%.
Despite the INR's depreciation against the US dollar, it appreciated against other major currencies, such as the Pound Sterling (6.7%), Japanese Yen (14.5%), and Euro (6.4%) from April to December 2022. Real Effective Exchange Rate (REER) measurements indicated a modest INR depreciation of 3.4% and 4.0% in 6-currency and 40-currency trade-weighted indices, respectively, on a financial year basis. In December 2022, the rupee depreciated by 4.4% and 4.7% in terms of 6-currency and 40-currency NEER, reflecting orderly movements despite global uncertainties.
International Investment Position: A Reflection of India's Financial Soundness
As of end-September 2022, India's International Investment Position (IIP) reveals a decrease of US$73.0 billion (7.9%) in residents' overseas financial assets, mainly due to reduced reserve assets despite increased trade credit and overseas direct investment. Reserve assets, comprising 62.9% of international financial assets at US$532.7 billion, decreased by 12.3%. International liabilities, amounting to US$1,237.1 billion, decreased by US$41.6 billion (3.2%), primarily due to net outflows in direct investment and exchange rate variations. India's net claims of non-residents increased to US$389.6 billion, covering 68.5% of international financial liabilities.
Safe and Sound External Debt Situation
As of end-September 2022, India's external debt increased by 1.3% to US$610.5 billion, but the debt-to-GDP ratio declined to 19.2%. Long-term debt decreased to US$478.7 billion (78.4%), while short-term debt rose to US$131.7 billion (21.6%), primarily comprising trade credit. About 55.5% of external debt is in US dollars, and 30.2% is in Indian rupees, mitigating foreign currency risks. Sovereign External Debt (SED) decreased by 5.7% to US$124.5 billion, while non-SED grew by 3.2% to US$486.0 billion. India's external debt vulnerability indicators remained favorable, with a debt-to-GDP ratio lower than peers and a comfortable level of foreign exchange reserves.
Outlook for the External Sector: Cautious Amidst Global Headwinds
India's merchandise exports are impacted by slowing global demand, with forecasted weak global growth in 2022-2023. Diversification through Free Trade Agreements (FTAs) and a focus on efficiency and innovation are crucial for export growth. Despite competition from South Asian countries, India's demographic advantage and economies of scale position it favorably. While the outlook for oil imports is favorable, resilient non-oil, non-gold imports contribute to a manageable current account deficit. India's robust service exports, record remittances, strong FDI, positive FPI inflows, and comfortable forex reserves provide innate buffers, positioning India's external sector relatively stronger compared to peers amid global challenges.
