By K Raveendran
India’s 2022 began with hopes of a rebound from covid-induced downturn, which materialized to a large extent as the year progressed, but is winding down to a close with dark clouds beginning to appear on the horizon over threats of a return to the pandemic environment.
The government hasn’t yet enforced covid protocol, but from the speed at which new variants of the virus are spreading in China, the US and other western countries, it appears that it is too early to pronounce that the pandemic has been seen off. Air travel restrictions are slowly coming back, with passengers required to carry covid-free certificates, compulsory as well as random checks as well as quarantine, depending on the port of origin.
Although the country has achieved significant progress though appropriate responses to post pandemic economic shocks with fiscal policy measures, new headwinds are emerging, which are clouding the outlook. There are also signs of new external risks as any sharp slowdowns in global growth are expected to affect India through trade and financial channels. The threat of intensified spill-overs from the war in Ukraine can continue to cause disruptions.
The post-pandemic rebound was unmistakable. Real GDP grew by 8.7 percent in financial year 2021-22, bringing total output above pre pandemic levels. Growth has continued this year, supported by a recovery in the labour market and increasing credit to the private sector. Policies were put in place to address new economic headwinds, such as inflation pressures, tighter global financial conditions, the fallout from the war in Ukraine and associated sanctions on Russia, and significantly slower growth in China and advanced economies. Monetary policy accommodation has been gradually withdrawn and the main policy rate has been increased by 190 basis points so far in 2022.
Timing with the year-end, the International Monetary Fund (IMF) has just concluded its 2022 Articles IV consultations with India and the Fund officials have commended the achievements, while at the same time noting the risks that lie ahead. Growth is expected to moderate reflecting the less favourable outlook and tighter financial conditions. Real GDP is projected to grow at 6.8 percent and 6.1 percent in 2022-23 and 2023-24 respectively. Reflecting broad based price pressures, inflation is projected at 6.9 percent in 2022-23 and is expected to moderate only gradually over the next year. The current account deficit is expected to increase to 3.5 percent of GDP in the current financial year as a result of both higher commodity prices and strengthening import demand.
Another cause of worry is inflation, which has been at or above the RBI’s tolerance band of 4 plus or minus 2 percent since January 2022, in the context of growing domestic demand, commodity and food price shocks and supply chain disruptions. Headline consumer price inflation rose slightly to 7.4 percent in September, led by a pickup in food inflation to 8.4 percent. Core inflation, excluding food and fuel remained high at 6 percent. Long-term inflation expectations remain relatively well anchored. However, the risk of second-round effects from fuel and commodity price shocks remains high, according to IMF.
More notably, the vulnerability of weaker sections continues to be unduly high. Women, youth, those with less skills and education, and daily wage and migrant workers are among those who bear the brunt. Access to education and training continues to be a problem for the vulnerable sections and has adversely impacted human capital accumulation. While there has been broad-based post-pandemic recovery in employment, it is uneven across sectors. The sluggish recovery in real earnings weighs on consumption. While government policy measures have helped significantly, the pandemic has temporarily disrupted gains in human development.
Current account surpluses and large capital inflows helped the RBI replenish its international reserves during the pandemic. In 2021-22, however, the current account returned to a deficit of about 1.2 percent of GDP, reflecting the domestic demand recovery and rising commodity prices. IMF has assessed the current account gap at 1 percent of GDP, after accounting for transitory impacts of the covid shock.
While the adverse impact of higher imported oil prices was mitigated by importing oil from Russia at a discounted price, the pressures on the exchange rate of the rupee. Notwithstanding steady FDI inflows, portfolio investment outflows in the first half of 2022 also put pressure on the rupee’s exchange rate. Reflecting both valuation losses as well as RBI intervention, forex reserves have fallen and are currently at about 7 months of prospective imports requirement.
The Fund has cautioned that the emergence of more contagious covid variants can dent confidence and force new mobility restrictions, with impact on trade and growth. Tightening financial conditions can weaken asset quality and result in financial sector stress, limiting credit provision and negatively impacting long-term growth. (IPA Service)