Reforms and Resilience raise prospects for the Indian economy

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Venkat Raman
Auckland, January 25, 2022

As India celebrates its 72nd Republic Day (and 71st Anniversary) on January 26, 2022, the government and people of this great country can look forward to the New Year with renewed confidence as the economy is expected to return to robust growth.

Perception of the future is punctuated by resilience, which in turn will be driven by economic and social reforms that the country is expected to administer. However, political differences, communal disharmony and discard and feelings of discrimination look large among minority communities, which could pose serious challenges. In addition, the continued onslaught of Covid-19 with its variants is likely to exercise further pressure on the socio-economic fabric.

We will address these separately in another article.

World Bank Group President David Malpass (Wikipedia)

State of the Global Economy

Uncertainty continues to dominate the global economy this year, although there was a rebound in 2021. In its latest Global Economic Prospects Report, the World Bank has presented a gloomy picture of the global economy for 2022.

World Bank Group President David Malpass said that major economies have been constrained to impose various types of restrictions amid growing threats of Covid-19, which are compounded by a rise in inflation, debt, income inequality, all of which could endanger the recovery in emerging and developing economies. Global growth is expected to decelerate markedly from 5.5% in 2021 to 4.1% in 2022 and 3.2% in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world.

“The rapid spread of the Omicron variant indicates that the pandemic is likely to continue to disrupt economic activity in the near term. In addition, a notable deceleration in major economies, including the United States and China, will weigh on external demand in emerging and developing economies. At a time when governments in many developing economies lack the policy space to support activity if needed, new Covid-19 outbreaks, persistent supply-chain bottlenecks and inflationary pressures, and elevated financial vulnerabilities in large swaths of the world could increase the risk of a hard landing,” he said.

Mr Malpass said that the global economy is simultaneously facing Covid-19, inflation and policy uncertainty with government spending and monetary policies in uncharted territory.

“Rising inequality and security challenges are particularly harmful to developing countries. Putting more countries on a favourable growth path requires concerted international action and a comprehensive set of national policy responses,” he said.

(Graph Courtesy: Business Today, India)

India’s Economic Indicators

The World Bank has retained India’s economic growth forecast for the current fiscal at 8.3%  as the recovery is yet to become broad-based.

As per the first advanced estimates of the national income released by the National Statistical Office (NSO), the economy is projected to grow at 9.2% in 2021-22, surpassing pre-Covid-level in actual terms, mainly on account of improved performance, especially in farm, mining and manufacturing sectors.

“India’s economy is expected to expand by 8.3% in the fiscal year 2021-2022 (ending March 2022), unchanged from last June’s forecast as the recovery is yet to become broad-based. The economy should benefit from the resumption of contact-intensive services, and ongoing but narrowing monetary and fiscal policy support,” the World Bank said in its latest Global Economic Prospects report.

The World Bank has upgraded growth forecast for 2022-23 and 2023-24 to 8.7% and 6.8%, respectively. The upward revision reflects an improving investment outlook with private investment, particularly manufacturing, benefiting from the Production-Linked Incentive (PLI) Scheme, and increases in infrastructure investment.

“The growth outlook will also be supported by ongoing structural reforms, a better-than-expected financial sector recovery, and measures to resolve financial sector challenges despite ongoing risks,” the Report said.

It also noted that consumer inflation in the major economies of South Asia has been above central banks’ targets since late 2019.

(Infographics by Goldman Sachs)

Inflationary Pressures

Easing supply disruptions related to Covid and deficient demand contributed to a return of inflation toward the mid-point of the 2% to 6% target range since mid-2021. Core inflation, however, remains at the upper end of the target range. The Report said that following the major setback to health and economic activity caused by the mid-2021 second wave of Covid South Asia, economic activity has recovered.

The economic damage caused by the second wave has already been unwound with output effectively back to levels reached before the pandemic (2019 Q4) as Covid cases and restrictions subsided.

International Monetary Fund forecasts

International Monetary Fund projections are also encouraging. The Agency’s latest Report has said that the Indian economy is poised for a rebound after enduring a second wave of Covid-19 infections this year that further constrained activity and took a heavy toll on its people.

In a recent Podcast, IMF Senior Resident Representative to India Dr Luis Breuer said that what happens in India has a big impact on the region and the world.

IMF Resident Representative (India) Dr Luis Breuer (Flickr)

“You are talking about a large slice of humanity and the global economy,” he said.

The Agency’s Annual Review said that a broad range of fiscal, monetary and health responses to the crisis supported its recovery and, along with economic reforms, is helping to mitigate a longer-lasting adverse impact of the crisis.

According to Dr Breuer, though policy steps helped mitigate the pandemic, it is still likely to result in greater poverty and inequality.

“And the path of recovery will follow the path of the virus. New infections have fallen significantly and vaccination rates have risen to surpass a billion doses, although another resurgence is not impossible even if it seems unlikely today. There is a lot of uncertainty about Covid. We cannot rule out future waves,” he said.

Goldman Sachs on India’s GDP

Goldman Sachs, the world’s leading financial investments and advisory firm, has forecast India’s Gross Domestic Product (GDP) to grow to 9.1% year-on-year in 2022, from 8% in 2021, following a sharp contraction of 7% in 2020, driven by consumption.

According to the World Bank, the Gross Domestic Product (GDP) in India was worth US$ 2622.98 billion (about US$ 2.62 trillion) in 2020.

The GDP value of India represents 2.32% of the world economy.

Goldman Sachs Chief Economist for Asia and Pacific Andrew Tilton said that his firm expects consumption to be an important contributor to the growth in the Indian economy in 2022, as the economy fully re-opens, driven by a notable improvement in the virus situation and adequate progress on vaccination.

Goldman Sachs has also predicted the continuation of government capital spending and sees nascent signs of the private corporate capital expenditure recovery, including a revival in housing investment.

The firm’s forecast Consumer Price Index (CPI) Inflation is set to rise to 5.8% year-over-year in 2022 from 5.21% in 2021, driven by a rise in core inflation. This would be a result of a rise in core inflation as manufacturers pass on input cost increases to consumers, considering that demand recovers as the economy recovers fully.

Tightening Liquidity

The Reserve Bank of India (RBI) is currently in the second stage of liquidity tightening as a part of its four-stage monetary policy normalisation, which commenced with dovish comments from the Monetary Policy Committee (MPC) members.

Goldman Sachs Economist in India, Santanu Sengupta said that the firm expects this second stage to end with repo rate hikes.

“In our view, the RBI will likely move to stage 3 [reverse repo hike] by the end of this year and start hiking repo rates from Q2 2022. We expect a cumulative 75 basis points of repo rate hikes in 2022. The apex bank will continue to exit the extraordinary monetary accommodation which has been in force since the beginning of the pandemic,” he said.

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