The Indian economy remains a bright spot in South Asia

walterbibikow · Dec 1, 2022

Few parts of the world will limp into 2023 quite like South Asia. Consider the year the region has just had. In Sri Lanka, the economy collapsed, inflation hit 70%, food and fuel ran short and a president was chased out of the country by a popular uprising. Pakistan flirted with default, suffered biblical floods that caused an estimated $32bn-40bn in damage, and must put up with constant disruption from Imran Khan, a rabble-rousing ex-prime minister, who is making the country ungovernable. In Bangladesh, there were horrifying industrial accidents, more floods, and a public losing patience with the 1m Rohingya refugees they must support. Nepal faced dwindling foreign-currency reserves.

https://twitter.com/x/status/1598162203676401665

Yet amid all this gloom there is one bright spot. By most standards, India sailed through 2022 relatively unscathed. The lifting of pandemic restrictions allowed normal life to resume and migrants to move around the country once more. The central bank’s rate rises have been less brutal than those of rich countries. Inflation, at about 7%, looked positively cool compared with America and Britain, let alone Pakistan and Sri Lanka. The economy was forecast to expand by a respectable 6.8% for the full year, outstripping any major economy bar Saudi Arabia. Measured in dollars at current prices, India is now the world’s fifth biggest economy, taking Britain’s spot. The gap between the two will only widen in 2023, reckons the imf.

"The whole region is paying the price for Russia’s war in Ukraine"

The ruling Bharatiya Janata Party’s convincing re-election in Uttar Pradesh, a big state, and many smaller ones too, offers stability in a restive region. Abroad, Narendra Modi, the prime minister, managed a tricky balancing act between Russia, a historical ally, and the West, to which India is inching closer. His foreign minister, S. Jaishankar, deftly defended India’s right to prioritise its national interests

India’s remarkable run looks set to continue in 2023. Even as China suffers from a self-inflicted slowdown, and parts of the West teeter on the edge of recession, India’s growth will barely decelerate. Its economy is expected to expand by 6.1%. In part this is down to interest from abroad. As the West’s relationship with China grows more hostile, companies are looking to shift their manufacturing bases elsewhere. India is a big beneficiary.

The other factor driving India’s expansion is domestic investment. The country’s biggest conglomerates are ploughing money into clean energy, including solar, wind and hydrogen. Many companies are lured by government subsidies encouraging manufacturing in 14 “key industries”, including electronics, drugs, drones and batteries. Indian giants such as Adani and Reliance, as well as newer firms like Ola, a ride-sharing and electric-scooter startup, are taking advantage.

Yet India will not grow in splendid isolation. Like the rest of South Asia, it faces risks from events and trends beyond its control. Three factors threaten to destabilise the region in 2023. The first is the cost of living. Economic and climate crises had made life unaffordable for many in Sri Lanka and Pakistan, but the whole region is paying the price for Russia’s war in Ukraine, which has sent the cost of food and fuel soaring. A super-powered dollar, turbo-charged by America’s fast-tightening monetary policy, is driving up the price of everything else. Inflation in India may not be as bad as elsewhere, but it still pinches.

Another big worry is the increasingly unpredictable climate. In Pakistan and northern India, a record-breaking heatwave in March and April brought cities to a standstill as people were told to stay at home. Both countries also suffered from extreme rainfall. The region is particularly vulnerable to a changing climate. Expect more record-breaking heatwaves, droughts and floods. The third destabilising factor is geopolitics. India and China have still not resolved a border dispute that arose in the mountains in Ladakh in 2020. Amid mutual suspicion, small showdowns could turn into bigger ones, especially as India grows closer to the West.

South Asian countries battered by 12 months of upheaval will be hoping the new year is a quieter, more stable and more prosperous one. India, which has reached a turning point for its economy, will be hoping much the same.