FRACTURED ECONOMIES

Reports from international agencies and individual countries indicate that almost all economies are currently fractured in one way or another. According to UNCTAD Trade and Development Report 2022 After a rapid but uneven recovery in 2021, the world economy is in the midst of cascading and multiplying crises.Incomes are still below at 2019 levels in many major economies and growth is slowing everywhere.The cost of living crisis is hurting  majority of households in both advanced and developing countries.Damaged supply chains remain fragile in key sectors.Government budgets are under pressure from fiscal rules and highly volatile bond markets, Debt distressed countries, including over half of low income countries and about a third of middle income countries are edging over closer to default.It may be noted here that while financial markets are in jittery,both vaccine role out has been lagging and climate stress is intensifying across the globe particularly in many low income countries who lack the fiscal space to deal with disasters.

 The ongoing Ukraine war, sanctions imposed and geopolitical tensions coupled with energy and commodity shocks, trade disruptions, financial and exchange rate instability, inflationary pressures, forced migration and unstable remittance flows in various countries are impacting economic growth and stability.World output growth which was only 2.9% in 1990s increased to 3.3% in2000s but contracted to -3.4% in 2020 and firmly recovered to 5.8% in 2021 and forecasted to grow 2.5% in 2022 and 2.2% in 2023.Africa is projected to grow 2.7 and 2.4 percentage respectively in 2022 and 2023 as against America 2.1 and 1.0,USA 1.9 and 0.9, Europe 1.2 and 0.5, European Union 2.0 and 0.6, France 2.0 and 1.0, Germany 1.1 and 0.0.Russian Federation -7.4 and 1.3, United Kingdom 2.6 and -0.9,Asia 3.5 and 4.1,China 3.9 and 5.3, India 5.7 and 4.7, Japan 1.0 and 1.8  Australia 3.9 and 2.3 ,in 2022 and 2023 respectively.Developed countries are projected to grow 1.7 and 1.0 percent in 2022 and 2023 which is on average 0.5% points below the mean of pre covid period and 0.9% below pre global financial crisis mean.The slow down is particularly marked in the United Kingdom and the European Union especially in France Germany and Italy.On the otherhand for developing countries 3.7 and 0.0 were protected for the year 2022 and 2023 respectively by UNCTAD report.

According to IMF Annual Report 2022 the severity of disruptions in commodity markets and supply chains will impact much on macro financial stability and growth adding to already complicated policy environment for countries still recovering from the covid19 pandemic.Inflation which had already been rising in many countries due to supply demand imbalances and policy support during the pandemic is likely to persist longer . Tightening financial condition putting pressure on emerging markets and developing economies through increased borrowing costs and risks of capital. Consequent on Ukraine war and geopolitical tensions there is the risks of fragmenting world economy into geopolitical blocs with distinct cross border payment systems reserve currencies and distinct technology standards.The combination of continuous increase in policy rates of advanced countries ,higher domestic inflation and depreciating currencies are severely limiting the policy space available to central banks in developing countries.While 52 countries implemented accommodative reduction in policy rates during the pandemic support period, in contrast at least 51 countries raised policy median  rates from 4.0 to 4.9 percent between June 2021 and May 2022.Central banks in these countries have tried to preempt the expected policy tightening by Federal Reserves of USA from the second half of 2021onwards.However the US monetary tightening resulted in transmitting inflationary pressures to developing economies through balance of payments crises ,currency depreciation and outflows of foreign capital. As per OECD estimate CAD is projected at 7% of GDP in 2022 with US CAD pegged over 4%,and for UK it is expected to be higher triggerred by soaring interest rates in anticipation of government borrowings inflation coupled with implosion of pension fund management. Experts opine that the Truss Government in UK should roll out back its tax sops .It could replace price caps in energy with targeted subsidies in the absence of any prospects for a fiscal stimulus package. 

In fact due to increasing current account deficit and net capital outflows from South Asian region in first half of 2022 and consequent balance of payment pressures resulted in dwindling foreign exchange reserves forcing countries to approach  IMF for support by nations  like Srilanka, Pakistan and Bangladesh.World Bank has slashed India's GDP growth projection to 6.5% on account of external headwinds and Ukraine war.Rupee has fallen further to 82.42  per US dollar and India's foreign exchange reserves depleted by $ 110  since September 3 ,2021 to stabilise the rupee and FER  currently amount to $532.664. Production cut by OPEC + countries,weaker rupee further add to inflation and CAD vulnerabilities . Rupee is falling on account of widening CAD mostly due to rising oil import bill and capital outflows impacted by rate hikes introduced by US Federal Reserve.It may be noted here that nearly 60% of the rupees 20400 crores worth of shares sold by foreign portfolio investors in the second half of September were in financial and IT sectors. As far as FPI inflows are concerned fast moving consumer goods attracted largest share followed by Telecommunications, capital goods and consumer services. 

As far as India is concerned some silver lines are visible. For instance the extent of depreciation of rupee is less than most currencies including hard currencies like Euro and sterling pound.India's fiscal position is more stretched  than most of the countries. Despite the vigorous utilisation of foreign exchange reserves by RBI to the extent $110 billion since September 2021 to avoid voltatility  our FER position still continues to act as buffer against external sector pressures. In order to maintain FER reserves and currency stability we should vigorously pursue further the measures adopted to facilitate trade in Indian rupee. While bilateral trade with Russia affected by sanctions would help both India and its trading partner in checking the outflows of US $ and strengthen domestic currency. India is getting favourable response for the proposal for rupee trade from many countries struggling with hard currency deficit including Srilanka,Maldives ,Nigeria,  Zimbabwe and Argentina.Moreover BRICS Contingent Reserve Arrangement (CRA) in 2014  6th BRICS summit proposed to provide short term liquidity support to the members through currency swaps to help mitigating Balance of payment crisis and strengthen financial stability . Total committed capital resources were $100 billion shared by  members China $41 billion, India $18 billion, Brazil $18 billion, Russia $18 billion and South Africa $5 billion. If the proposed rupee -  rouble transaction has taken off  and  trade with Russia along with other willing countries in exchange for rupee to their respective currencies for trade can obviously reduce pressures on exchange rate, foreign exchange reserves and current account deficit. Even though service sector exports particularly software exports helped to buttress merchandise deficit to a great extent, future of trade prospects depend on our trade competitiveness,evolving global and domestic demand and supply conditions that impinge the fractured economy.