Why rapid economic growth can follow high inflation

If we look at what has happened over the past 15 years, every adversity was also an opportunity. Looking back, we can all argue about how safe it would have been to pursue those opportunities, but fear and noise tend to keep most of us from making rational decisions. It would therefore be useful to be able to cancel out some of the noise that lingers in the current scenario, whether it is the recent depreciation of the Indian currency, high inflation or weak growth.

The Rupee has depreciated against the US Dollar, but that’s not the full picture: trading took place when our currency was at 50 to the dollar, and trading is also taking place at current levels. More than the absolute value of a currency, what matters is its stability. A slow and steady appreciation or depreciation has no negative impact. By now everyone knows that when the U.S. Federal Reserve decided to raise interest rates, the funnel of funds turned toward the United States, and that shift in global flows led to a stronger dollar. However, an important point to note is that not all currencies reacted in the same way. The Indian rupee has indeed depreciated against the dollar, but it has appreciated against other major currencies. And we are not alone; some of the other Asian currencies also performed well.

This outperformance of our rupee is despite the fact that we are a net importer of oil, which leads to a trade deficit. Even on the trade deficit front, the absolute figure may seem worrying, but as a percentage of total trade, this discrepancy is far from alarming. Our foreign exchange reserves as a proportion of gross domestic product (GDP) also make our currency one of the strongest among those in any consideration basket other than the dollar. The current demand for dollars is more of a realignment and not driven by long-term economic prospects.

Inflation is high but not structural in nature: Beyond a certain point, inflation hurts everyone. High inflation has gripped all economies because it is cost inflation. Any student of economics will argue that raising interest rates is not the only solution to reducing inflation which is caused by supply constraints. The Reserve Bank of India (RBI) swallowed all the criticism of being behind the curve in the first quarter of 2022, but we think it was prudent not to proactively raise policy rates in an inflationary environment that n was not driven by demand. RBI made the right choice by assessing the global situation and taking a reactive approach.

The government has also played an important role in managing domestic inflation by taking various measures, particularly in the oil sector. His reduction in fuel excise duty has been a great relief in the short term, while his ethanol blending policy will also help the cause in the medium term. Raising export duties on some commodities was another effort to manage their prices, albeit globally tied. Various ongoing programs under the Pradhan Mantri Awas Yojana have also contributed to easing the inflationary pressure at the bottom of the pyramid.

Although it is too early to make a clear assessment, this combined effort by the RBI and the government, along with some easing in commodity prices, has seen inflation come down and now appear stable at around 7%. This is a much better scenario than in the United States, where inflation hovers around 9% and the Fed faces the dilemma of raising interest rates further at the cost of a recession.

India’s economy is on a high-growth launch pad: the biggest boost to growth comes from private investment in the form of capacity expansion. The current capacity utilization range of 70-75% is now pushing Indian companies to build new capacity. Currently, corporate balance sheets are not sufficiently leveraged, indicating the possibility of significant capacity expansion in the years to come. The country’s banking system is sufficiently capitalized for lending and the quality of the books is much better than in pre-covid times. Credit drawdown data also suggests that lending is gaining momentum.

The finances of the government in such a period can be heckled, leading to an increase in its budget deficit. However, robust GST collection, whether due to growth or an increase in the efficiency of tax collection, provides us with much-needed comfort. Once our inflation concerns have subsided, a small growth spurt by the government will have a cascading effect that should put our economy on a strong growth path.

The whole world is going through a difficult period, facing inflation, low growth and geopolitical problems, the fear of covid persisting. We cannot detach ourselves from these worries. But in all difficult times, great opportunities arise. We believe India is perfectly positioned today to follow a multi-year trend of strong growth.

Rashmi Saluja is Executive Chairman of Religare Enterprises Ltd.

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