Will China’s zero-Covid policy further snarl India’s slowing GDP growth?

India’s GDP grew 8.7 per cent in the year to March, and while that rate may be cut to 7 per cent in the next 12 months, it’s higher than China’s 2022 forecast
China’s pandemic measures, market shocks from Russia’s invasion of Ukraine and inflation are all expected to have an impact on India’s GDP

India

Penny MacRae

Published: 8:30am, 2 Jun, 2022

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Supply shocks from China’s zero-Covid policy, inflation at multi-year highs and economic spillovers from Russia’s invasion of Ukraine are clouding the outlook for India whose gross domestic product (GDP) grew by 4.1 per cent in the quarter starting in March, its slowest pace in 12 months.

The economy expanded by 8.7 per cent in the full 2021-22 financial year, falling shy of the government’s 8.9 per cent target. But the growth was still the fastest of big countries, giving a boost to the government of Prime Minister Narendra Modi, who has been in power for eight years and is likely to run for a third term in 2024.

The expansion marked a sharp turnaround from the previous year when the economy contracted by an unprecedented 6.6 per cent, slammed by the pandemic.

India’s Chief Economic Adviser V. Anantha Nageswaran forecast growth would decelerate to “around 7 per cent” in this financial year. That performance would far eclipse China’s; global investment firm UBS Group this week forecast the country’s growth would crash to 3 per cent – down from 8.1 per cent last year – due to zero-Covid lockdowns.

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“I’d very happily place a bet against India getting into a recession,” Nageswaran said after the data’s release on Tuesday. But he added that “we must also consider global impacts; China supply chain bottlenecks will have an impact” on growth.

Parts shortages due to China’s pandemic curbs and the war in Ukraine have been hitting India’s production of cars and electronic products, with firms expecting limited supplies all year.

Leading automobile maker Maruti Suzuki said dispatches from its factories to dealers fell 10 per cent in April year-on-year due to supply-related issues.

Looming as one of the biggest challenges, though, is inflation riding at an eight-year high of 7.8 per cent, driven by soaring food and oil prices. Even before Russia invaded Ukraine, inflation was above the central bank’s 6 per cent ceiling.

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The Reserve Bank of India hiked its leading policy rate in a surprise out-of-cycle move in May to 4.4 per cent from a record 4 per cent low, and economists expect another half percentage point rise this month.

“The peak impact of interest rate hikes on GDP will be felt only towards the end of this fiscal year,” said Dharmakirti Joshi, chief economist at ratings firm Crisil. “Headwinds from slower global growth and higher oil prices have tilted the risks to our (original) forecast of 7.3% for the current fiscal downwards.”

India, which has remained neutral in the Russia-Ukraine conflict, imports 80 per cent of its crude oil needs and, like China, has been buying record amounts of discounted Russian oil. But distance and the need for special refining capabilities to process Russia’s flagship Urals crude means there is a limit on how much it can purchase.

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In a country where consumers are notoriously cost-sensitive, economists say the growth-focused central bank has fallen behind its global peers in tightening monetary policy and may have allowed inflation to become entrenched.

Higher prices means a bigger chunk of people’s incomes goes on necessities, and consumer spending is India’s biggest growth driver, accounting for 55 per cent of the economy. But worryingly, private consumption grew by just 1.77 per cent in the fourth-quarter of the 2021-2022 financial year as consumers, anxious about the future, remained frugal.

Sanjiv Mehta, chief executive of consumer goods giant Hindustan Unilever, called the inflation rise “dramatic” in a conference call with analysts, investors and the media. He said consumers were “looking for better value across their purchase basket and food-and-kitchen items are being prioritised over discretionary categories”.

Indian widow Gita Sen, 70, who gets a small allowance from the government, prepares her morning tea inside her rented room in a Kolkata slum last month. Photo: Reuters

Stoking inflation has been a five-month slide in the value of the Indian rupee, Asia’s worst-performing currency, making imports costlier. The rupee skidded to another lifetime low against the US dollar on Tuesday, hitting 77.71 on the back of surging Treasury yields and other US assets that are vacuuming up funds from riskier emerging markets.

“High inflation will probably still weigh on private consumption, while interest rate hikes… will begin to take a toll on investment before long too,” said Adam Hoyes, economist at Capital Economics, a research consultancy based in London. Also, economists say surging prices of freight, commodities like steel and semiconductors may push companies to cut investment.

Manufacturing growth shrank by 0.2 per cent in the fourth quarter, reflecting disruptions in movement of goods and supply chains as a result of China’s zero-Covid policy and the war. But for the full-year, manufacturing output grew by 9.9 per cent, which the government hopes portends a brighter future. Mining expanded 6.7 per cent in the fourth quarter of the 2021-2022 financial year, while agriculture grew by 3 per cent.

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With India expected to add another 183 million people to its workforce over the next three decades, it is vital the country creates a large manufacturing base to soak up entrants.

Otherwise, what is called India’s “demographic dividend” may turn into a disastrous liability, economists say. Particularly worrying is India’s labour force participation, standing at just 47.3 per cent, compared to 68 per cent in China and 61 per cent in the US. This means many people in India remain out of the labour market due to a lack of jobs.

The Indian government hopes the nation will gain from moves by multinational companies’ to diversify away from China.

The news was not all bleak, though. The weather office gave a bountiful rain forecast for the July-September monsoon season, saying India is likely to get a fourth straight year of “normal or above normal” precipitation after a blistering heatwave pushed temperatures to their hottest in 122 years in April and blighted crops, forcing a ban on wheat exports.

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Economists believe the monsoon, which waters more than half of India’s agricultural land and is critical for farm output, should lift demand in rural areas where 70 per cent of the population lives and underpin the budding recovery after the economy shrank by an unprecedented 6.6 per cent in the previous year.

Also on the positive side for the authorities, the central government’s fiscal deficit for the 2021-2022 financial year came in at 6.7 per cent, undershooting the revised target by 0.2 per cent.

Shaktikanta Das, at the helm of the government-owned Reserve Bank of India, said the bank, while seeking to contain price rises, had not lost sight of the need to support growth.

“We are committed to containing inflation. At the same time, we have to keep in mind the requirements of growth. It can’t be a situation where the operation is successful and the patient is dead,” he told The Economic Times.