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‘Trade shocks and volatile commodity prices key concerns’

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Upasana Chachra, Chief India Economist, Morgan Stanley

NEW DELHI : Trade shocks and volatile commodity prices are among key concerns for the economy as these external factors may not only disrupt exports but also impact India’s domestic production and capex cycles, Upasana Chachra, Chief India Economist, Morgan Stanley said in an interview. On the rising share of discounted Russian oil in India’s overall oil imports, Chachra said India may not see a decline in energy costs due to logistics challenges. Edited excerpts:

The recent GDP numbers indicate a sequential decline in the growth rate. What are the key risks going forward?

Primarily, the concerns stem from the external side such as slowdown in global growth, trade shocks and higher commodity prices. India is a net commodity importer, and therefore trade related difficulties impact inflation, current account deficit and growth with a negative bias. So we are concerned about how this will impact consumption and investment trends in the coming quarters. Exports to GDP are at about 21% and therefore a slowdown in global growth will not only have a direct impact through the export channel but it also tends to impact India’s domestic production and capex cycles. 

Our exports were at a record high but there is a sense that it’s not the volume that is driving, it’s the value. Will growth in exports hold up in the coming few months?

Yes, there is an impact of higher commodity prices seeping into the export basket as well. Definitely, the value numbers are growing at a fast rate and we’re seeing exports hit all-time highs. Export volumes are not very robust but still will be better than what we’ve seen in the pre-pandemic trend. There is a slight improvement that’s happening on the goods export side; I wouldn’t say it’s all value. Also, India’s exports are doing reasonably well if we track them versus some of the other regional economies. Trade deficit has been widening and tracking around the $20 billion mark since September 2021. The trade deficit for May widened to $23.3 billion, an all-time high and as a percentage of GDP too it has risen to an 8-month high of 8.8% of GDP on a monthly annualized basis. However, most of this rise in the trade deficit has been driven by higher commodity prices, especially oil, but also fertilizers, edible oils, coal, chemicals etc. We expect the merchandise trade deficit to remain high and push the current account deficit to a 10 year high of 3.3% of GDP.

What do think will be RBI’s next move?

Inflation is definitely at the centre-stage right now. RBI has made it quite clear that inflation takes precedence over growth now, given inflation is above their upper threshold of the 2-6% band. At the moment, I think both the RBI and the government are in sync to sort of control these inflationary pressures, which to a large extent are coming from supply side imbalances. In terms of inflation trajectory, we do expect inflation to remain elevated at or above the 7% mark for the next few readings. RBI will be taking up front-loaded rate hikes.

Do you think the wheat export ban and curb in sugar exports are protectionist measures?

The government is trying to ensure that there are no undue domestic price pressures, especially related to food. The government has tried to sort of safeguard domestic interests at the moment. From a global context, I think, especially on the food grain or the wheat part, India is not a very large player in the export market as yet. So it will not have a lot of impacts. But yes, we could be looking at more consistent policies from the government, especially related to agri exports in future.

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