India appears to be on the road to recovery, as evidenced by Diwali festival sales across the country. The Confederation of All Traders of India (CAIT) announced a global sale of Rs 1.25 lakh crore during the festival, a record sales figure over the past 10 years according to the body of traders’ announcement made a day after Diwali.

Aside from consumption, industrial production has also seen growth. Flash estimates of the industrial production index show an 11.9% growth in August 2021 compared to the corresponding period last year, while the manufacturing sector grew by 9.7%. The manufacturing purchasing managers index (PMI) at 53.7 and the services purchasing managers index at 55.2 in September 2021 indicate optimism about economic activity.

Retail price inflation based on the Consumer Price Index at 4.35% in September 2021 was not only a percentage point lower than its August 2021 level, but was also the inflation rate on the market. lowest in India since January 2021.

Regarding the external sector, India recorded a current account surplus of 0.9% of GDP. The recorded current account surplus appears robust, resulting as it did from a contraction of the trade deficit, an increase in net service receipts and an increase in remittances from Indians employed abroad. , as well as a decrease in net payments of foreign investment income. To add to the current account surplus, high foreign direct investment (FDI) and foreign portfolio investment (FDI) allowed India to add $ 31.9 billion to its foreign exchange reserves in September 2021 .

While the domestic economy appears to be well under macro control, India should guard against external macro developments that could derail the recovery. We consider three of these developments that could impact India, as well as the channels through which such an impact is likely to be felt.

1. Higher global inflation: Advanced economies (EAs) and emerging market economies have experienced higher inflationary pressures mainly due to high commodity and fuel prices. The central banks of the two sets of economies have therefore started to tighten their monetary policies to cope with this inflation. This has had the effect of increasing global bond yields, especially those of EAs, including the United States. Higher bond yields have the potential to negatively affect India through multiple channels. First, the flow of capital to Indian stock markets via the REIT channel would be affected, as global investors would find it more lucrative to invest in AE bonds, which would affect India’s balance of payments. REITs are not the most desirable form of capital flow due to their volatility; but the REIT when invested in equity is a desirable capital flow. Second, it would lead to a depreciation of the rupee, with the attendant risks of making our imports even more expensive. Third, companies that depend on external borrowing would see their borrowing costs higher, which would affect their returns. More importantly, a depreciation of the rupee would weaken their position further since borrowing in US dollars would pinch them further.

2. Economic recovery in America: The United States reported fewer than 300,000 jobless claims filed during the week ending October 9, the lowest since the start of the pandemic. These numbers, along with its inflation data which showed a 13-year high of 5.4% in September 2021, point to an economic recovery in the United States. America’s latest development by passing a $ 1 trillion infrastructure bill to boost its freeway, broadband, and infrastructure is likely to further help America’s recovery, creating jobs and boosting competitiveness from this country.

Prospects for a recovery have already led the United States to announce its decision to begin ending some of its emergency stimulus measures introduced to tackle the pandemic-induced recession, starting with cutting its monthly schedule. purchase of bonds. In October, the US Federal Reserve indicated that such a reduction could begin from mid-November, with the Fed slowly reducing its bond purchases by $ 120 billion per month. The Fed recently indicated that it would start by reducing Treasury bonds by $ 10 billion per month and mortgage-backed securities by $ 5 billion per month, for a total reduction of $ 15 billion per month. Such a recovery and the resulting tapering would also affect US bond yields. Bond yields have already fallen from 0.91% at the start of 2021 to 1.549% in November 2021. The US tapering should further tighten bond yields, with its consequences for India.

3. Chinese slowdown: China’s GDP growth in the third quarter of 2021-22 slowed to 4.9%, which is lower than the 5.2% forecast. With the massive fuel crunch affecting the country’s growth, the systemic crisis in its real estate and construction sectors, and the government’s crackdown on big business in an effort to address income inequalities and put corporations in line, corporate sentiment and, as a result, growth suffered. The Chinese slowdown could hit India through the trade channel, given that New Delhi’s bilateral trade with Beijing in 2021 was significantly above pre-pandemic levels. Bilateral trade with China increased by 29.7% in the first nine months of 2021, compared to the same period in 2019. India’s exports increased by much more (by 64.5%) compared to to its imports, which increased by 21.5%. In fact, India’s trade with China is expected to cross the $ 100 billion mark by the end of 2021. Even for China, trade growth with India has been among the fastest in comparison. to its other major trading partners.

These global macro-developments, with their potential for spillovers and spillovers, will need to be carefully monitored by Indian policymakers and factored into policymaking, even if they pursue their goal of “maintaining price stability throughout.” keeping in mind… growth ”.

(Views are personal)

Tulsi Jayakumar

Professor, economics and president, family-run business at SPJIMR Bhavan

([email protected])