Arvind's Newsletter

India’s Economic Survey for 2022-23 has projected GDP growth rate in the range of 6 to 6.8% for the next fiscal year 2023-24, as against projected growth of 7% in the current year.The Medium-term growth has been projected at a modest 6.5-7% p.a. This growth rate implies that Indian economy will fall short of its goal of becoming a $5 trillion economy in 5 years opines the Mint.

On inflation, the Survey is optimistic that the worst is behind us and expects inflation next fiscal to be below the RBI’s upper bound of 6%. Read on

Meanwhile, The global economy is poised for a rebound as inflation ease and will probably avoid a recession, the International Monetary Fund projected. The multilateral lender upgraded its forecasts upgraded its forecasts, driven largely by an end to China’s zero-COVID policy, a less-severe-than-expected energy crisis, and a successful fight against inflation. Growth will still be slower than in 2022, and remain low by historical standards, especially in rich countries. The only major economy likely to shrink in 2023 is Britain’s — expected to perform worse than sanction-hit Russia’s — although even in the U.K., things look less bleak than they did a few months ago.

But situation in Pakistan goes from bad to worse. After devastating floods, and severe power blackouts due failure of grid, Pakistan is at risk of defaulting on its debt. The country’s central bank does not have enough foreign currency to cover even one month’s worth of imports after last autumn’s floods wiped out harvests.

Pakistan’s moves to loosen its grip on the currency and increase fuel prices indicate that the beleaguered nation is finally taking the unpopular decisions needed to secure the $6.5 billion bailout program from the International Monetary Fund. Is this Pakistan’s 1991 moment?

The rupee fell to as low as 270 per dollar on Monday, according to the foreign-exchange desk at AKD Securities Ltd., as authorities allowed the currency to be more determined by the market, one of the preconditions of the IMF for the loan. The government also increased gasoline prices to record over the weekend, ahead of the arrival of the IMF team on Tuesday for a loan review after months of delay over the next loan tranche.

Pakistan is spiralling deeper into crisis amid a shortage of dollars and accelerating inflation, increasing the urgency for Prime Minister Shehbaz Sharif to secure funds from the IMF. The country direly needs funds as its reserves dropped to $3.7 billion, less than one month of import cover

Globalisation is out and Industrial policy is back.The European Union wants to relax its green-subsidies rules to compete with the United States’ new clean-tech law report the Financial Times. EU countries are subject to strict “state aid” rules, restricting the use of tax credits and other subsidies for businesses. They’re intended to encourage free trade. But Washington’s $370 billion Inflation Reduction Act has made green tech more attractive there. Europe is under pressure to respond. According to a leaked document seen by the Financial Times, the EU will make it easier to subsidize low carbon-tech like electric vehicles and carbon capture, and redirect some of its own COVID-19 recovery fund towards tax credits. Excerpts from FT article below:

“The EU is planning to hit back at the US’s $369bn Inflation Reduction Act by easing restrictions to allow a wave of tax credits for green investment.

Under a draft plan seen by the Financial Times, the European Commission will relax state-aid rules to support investment in green sectors, including via the creation of tax benefits. Some of the €800bn in its NextGenerationEU Covid-19 recovery fund could also be redirected towards tax credits, according to the draft.

The proposed measures, which have yet to be finalised and could change by Wednesday, are part of a comprehensive Brussels plan to respond to the US legislation, which has provoked a flood of warnings that companies will decamp from the EU to the US to take advantage of the subsidies.

By further relaxing the EU’s state-aid rulebook, which aims to avoid a subsidy race between member states, Brussels is attempting to emulate one of the most-vaunted benefits of the IRA, namely the simplicity of companies accessing federal tax credits.

But the move strays into controversial territory within the EU, as it will be far easier for deep-pocketed countries such as Germany to dole out fiscal incentives than their fiscally stretched counterparts in the south.

Member states are divided over whether and for how long to allow big exemptions from rules to police state aid. Some countries in the south warn that it risks tilting the level playing field by disproportionately aiding rich countries to pour money into their companies.”

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