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Interview: India's Exports Won’t Rebound Before Mid-2023

A rebound in India's exports will not emerge before the middle of 2023 given the weakness in global demand, says Lakshman Achuthan, co-founder of the New York-based Economic Cycle Research Institute (ECRI).

"Not in the coming months, certainly not before mid-2023," Achuthan said when asked when exports may experience a revival.

"But it's just too soon to tell because our leading indexes don't yet see any light at the end of the global recession tunnel," Achuthan told Moneycontrol via e-mail last week.

The global environment has become increasingly challenging in recent months, with monetary policy being tightened in a synchronised manner around the world to fight multi-decade-high inflation.

In October, the International Monetary Fund's top economist Pierre-Olivier Gourinchas warned that "the worst is yet to come and, for many people, 2023 will feel like a recession".

Meanwhile, Indian authorities have maintained that while India is not immune to global spillovers, the economy is seen as being resilient. Reserve Bank of India (RBI) Governor Shaktikanta Das said earlier this month that the growth momentum is "steadily improving".

At the same time, the first signs of the global slowdown affecting India were visible in the merchandise trade data for October, released on November 15.

India's merchandise exports contracted by 17 percent last month from a year ago to $29.78 billion, the data showed. It was the first time since February 2021 that monthly exports had fallen below the $30-billion mark and declined on a year-on-year basis.

India's economic growth has already started to come off, with Gross Domestic Product (GDP) growing by 13.5 percent in April-June – well below economists' expectations of 15 percent and the RBI's own forecast of 16.2 percent.

The battering the rupee has taken over the last 10 months or so, along with the Indian central bank failing to meet its inflation mandate, complete a difficult macroeconomic environment.

Domestic resilience

According to Achuthan, while the Indian economy is now "somewhat export-dependent" and cannot sidestep the impact of a global recession, the domestic growth outlook looks more resilient, measured by the ECRI's lead indictors.

However, he added it would be "a mistake to underestimate the hit to growth from substantially weaker global demand".

ECRI did not provide any of its recent leading indicators data to back Achuthan's reasoning, citing their proprietary nature.

The ECRI focuses on business cycles and pinpoints "turning points" in growth and inflation, distinguishing itself from economists who work with models to predict the future on the basis of what has happened in the recent past.

"This can seem to work for a while–until the critical moment when a turning point approaches and such models reliably fail. This is because extrapolating from the recent past is a sure-fire recipe for being surprised by the next turn," says the ECRI’s website, which lists the RBI among its clients.

According to the ECRI, the Indian central bank has "sought to better time its policy moves, with an eye toward smoothing out cycles in Indian economic growth in order to generate soft landing, as opposed to recession".

Pami Dua, a former external member of the RBI's Monetary Policy Committee (MPC) regularly cited ECRI's leading indicators in her statements in the committee's minutes. It is not clear if the RBI continues to employ the services of ECRI.

Signals from the US

The US Federal Reserve has led the charge in the tightening of monetary policy, with its November 2 interest rate hike taking the federal funds rate target range to 3.75-4 percent, with further tightening expected in mid-December.

While Achuthan expects the Fed to slow the pace of its rate hikes, the upcoming recession is unlikely to prompt a cut in interest rates at least for a year or so from now.

"A recession is highly likely and could well be deeper and more prolonged than presumed by the consensus. But the Fed doesn't see that as 'the cost of the Fed's steep rate hikes being greater than the gains from bringing inflation down quickly' (that's how some people in the financial markets see it)," Achuthan said.

"Rather, (Fed Chair) Jerome Powell has explicitly said that they know what to do if and when a recession arrives, even if it turns out to be long and deep. What the Fed cannot tolerate is inflation getting entrenched and staying well above the target, because that would fundamentally undermine the functioning of the economy."

According to Achuthan, US inflation has peaked. However, the decline in inflation will be relatively slow, particularly for core inflation. As such, the Fed may remain hawkish for the time being.

Data released on November 10, after the interaction with Achuthan, showed US prices rose 7.7 percent in October, down from an 8.2 percent increase in September. This is the smallest rise in inflation since January, before the start of Russia's invasion of Ukraine on February 24 that led to a surge in energy and commodity prices.

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