Global Economic Prospects and India's Growth

The World Bank's latest Global Economic Prospects (GEP) report highlights key growth forecasts for India and the global economy, emphasizing India's position as the fastest-growing major economy.

India's Economic Growth

• Growth Projections: India is projected to grow at a rate of 6.7% in both FY26 and FY27.
• Sectoral Insights:
  • The services sector is expected to maintain robust growth.
  • Manufacturing is likely to strengthen due to improvements in logistics infrastructure and tax reforms.
• Private Consumption: Predicted to increase due to a stronger labor market, expanding credit, and declining inflation, though urban consumption has been constrained by higher inflation and slower credit growth.
• Investment Growth: Supported by rising private investment, strong corporate balance sheets, and easing financing conditions.

Global Economic Outlook

• World Economic Growth: Projected to expand by 2.7% in 2025 and 2026, mirroring the pace of 2024 due to declining inflation and interest rates.
• South Asian Region: GDP growth is expected to reach 6.2% in 2025 and 2026, driven by India’s performance.
• Developing Economies:
  • Account for 60% of global growth but face the weakest long-term growth outlook since 2000.
  • Progress in catching up with advanced economies is expected to be slower.

Trends in Global Economic Integration

• Foreign Direct Investment (FDI): As a share of GDP, FDI flows to developing economies have halved compared to the early 2000s.
• Trade Restrictions: New global trade restrictions in 2024 are five times the 2010-19 average.
• Long-term Growth Trends: Overall global economic growth has decreased from 5.9% in the 2000s to 3.5% in the 2020s.

Key Observations

• Since 2014, developing economies, excluding China and India, have experienced lower per capita income growth compared to wealthy economies, widening the income gap.
• According to the World Bank, the next 25 years may present more challenges for developing economies compared to the past 25 years.

Impact of Rupee Depreciation on India

The depreciation of the Indian rupee is a cause for concern among policymakers, despite the notion of national pride associated with a strong currency. Ideally, a weaker rupee should benefit India by enhancing its exports' competitiveness and reducing import dependence.

Economic Implications

• Exports and Imports:
  • Cheaper exports increase competitiveness in foreign and domestic markets.
  • Costlier imports theoretically reduce competition from foreign goods.
• Strategic Advantage: Several countries, notably China, have used currency undervaluation to gain a competitive edge in manufacturing.

Challenges

• Trade Deficits: Historical export pessimism and declining manufacturing have left India as a net importer, leading to significant trade deficits.
• Import Nature: High oil import costs are a major challenge, making up 20% of imports and affecting inflation and trade balance.
• Foreign Exchange Reserves: The RBI can defend the rupee using reserves but at the cost of liquidity, impacting growth.

Strategies for Improvement

• Reducing Import Dependence:
  • Enhance domestic production of natural resources like oil and minerals.
  • Consider incentives similar to PLI for resources.
• Shift to Renewable Energy (RE): Reduce oil dependence by increasing RE capacity, especially in oil-intensive sectors like transportation.

Conclusion

A depreciating rupee, accompanied by strategic policies, can potentially transform India into a net exporting nation, contributing positively to its economic trajectory.

Foreign Currency Non-Resident (Bank) Deposits

The United Arab Emirates (UAE) and the United States (US) play a significant role in the FCNR (B) deposits mobilized by Indian banks, indicating a strong Indian banking presence in the Gulf region.

Key Statistics

• As of September 2024, the UAE accounted for 43% of the FCNR (B) deposits, up from 39% in March 2020.
• The share of the US decreased from 17% to 10.6% during the same period.

Reasons for UAE's Higher Share

Soumitra Sen, country head of consumer banking at IndusInd Bank, explains that Indian banks have a higher presence in the GCC, particularly the UAE, through representative offices and offshore branches, leading to a greater share of non-resident FCNR deposits from these regions.

Comparison with Other Countries

• The UK holds a 5.5% share of FCNR (B) deposits.
• Singapore accounts for 5%.

Lower US Share Explanation

Higher interest rates and bond yields in the US provide NRIs with more lucrative investment opportunities, reducing the appeal of FCNR (B) deposits.

GCC-based NRI Client Preferences

• NRIs see safety and higher returns in India compared to their country of residence.
• FCNR inflows grew faster due to the strength of the Indian economy and banking sector.

Nature of NRI Deposits

Unlike remittances for family maintenance or non-repatriable transfers, NRI deposits serve as savings and investment instruments and are repatriable.

RBI's Strategic Move

The Reserve Bank of India recently relaxed interest caps on FCNR (B) deposits, aiming for long-term growth rather than immediate impacts amidst volatile markets.