What lies ahead for India’s economy in 2022

That the Indian economy has almost caught up with the pre-pandemic growth levels is no mean achievement

That the Indian economy has almost caught up with the pre-pandemic growth levels and that its size in absolute terms has almost matched with the pre-pandemic year (2019) is no mean achievement after Covid-19 brought life to a grinding halt in 2020 and a part of 2021. Also, that the government’s revenues, at least on the tax side, has been doing wonderfully well despite handing out massive stimulus to lessen the impact of the virus is something that will be etched in the history books. The World Bank, The International Monetary Fund and The World Economic Forum are among a number of global institutions that have commended India’s policy response to the pandemic, not only in protecting its own population, but also providing medical supplies and equipment to more than 150 countries.

Despite the deadly Delta wave, India’s economy swung into action and emerged as the fastest-growing major one in the world in the July-September quarter for which the data is available in the public domain until now. Alongside tackling the Covid waves, the government has brought in reforms to boost manufacturing, which is the second largest contributor to India’s economy after services. Reforms in other sectors have also been undertaken, as a result of which the country is expected to reach its export target this year after a long period. India is also committed to increasing its infrastructure spending to Rs 111 lakh crore by 2025.

But, with the fast-spreading Omicron variant triggering another wave of the pandemic, does 2022 look as promising, especially when the government has to deal not only with the virus, but also an equally crucial issue of assembly elections in seven states? Another major challenge on the face of the government is the rampant rise in prices and growing unemployment due to the closure of many small and medium industries across the country, the data for which is not available. Supply chain disruptions due to Covid border controls have already wreaked havoc on prices and are expected to further increase in cost labour if infectious Omicron spreads fast.

What happens if the goods are not able to be transported from the place of production to the marketplace due to a log-jam of ports or border closure or even shortage of labour? Prices rise due to supply crunch, which is explained in the economic parlance as supply-side inflation. As a consequence, demand or consumption gets a severe jolt. That is what is happening across the globe and prompting inflation-targeting central banks to pause on easy monetary policy, even if it is of little help. Rising interest rates will be of little help in re-opening borders or calling labour back to work. Rising global oil prices have contributed another dimension to inflation and led to a surge in food and transportation costs despite the government resorting to a cut in the excise duty on petrol and diesel last month.

The RBI’s latest inflation expectation survey of households points to a surge in median inflation expectation of households in the near-term. As part of his observation in December’s financial stability report, Governor Shaktikanta Das has said that inflation continues to remain a concern buffeted by a build-up in cost pressures and posing a serious risk to economic prospects. High Inflation is bad not only from the common man’s perspective but also for the government as a whole. The rise in prices leads to rise in bond yields, making borrowing costlier for the government. The central government’s bond yields are on a spike already. The RBI has rightly cautioned policymakers on supply-side inflation which is not under its control. And, if it chooses to raise interest rates now, it will only throttle economic recovery.

Coming to jobs, the most important indicator of economic recovery. The most recent CMIE data suggests though the unemployment problem has eased a bit, urban joblessness rose to 8.21 per cent in November from 7.38 per cent. There is a decline in salaried jobs in urban India, which is a disturbing sign. There is an improvement in net addition in jobs in the country as a whole but quality jobs are still lacking. More worrying is the drop in the labour participation rate in those above 15 years of age compared to the pre-pandemic years.

Also read: Covid-19: 2022 starts with fear and hope

Massive mismatch

It is unemployment that raises concern and presents a massive mismatch between the GDP growth and the situation on the ground. The numbers show an improvement in the gross domestic product or the overall economy, which is likely to grow above 9 per cent in the current financial year that ends on March 31, 2022. It is a marked improvement from last year when the economy had contracted by 7.3 per cent. This should actually mean more income, more prosperity and more jobs. But that is not the case. The reason – a big chunk of India gets its livelihood from the small and medium sector. About 90 per cent of all jobs come from MSMEs, most of which have closed down, rendering individuals and households jobless and pushing millions into poverty. It is that part of India, which does not present itself in numbers. They are not documented.

So, the GDP numbers look good due to those who have performed well in the formal sector, which is documented. Formal sector firms have been doing well and continuously increasing their market share even during the pandemic. But that has slowly been giving rise to massive inequality across the country and it is for that reason economists have been drawing the government’s attention to a damaging ‘K’-shaped recovery. A K-shaped recovery occurs when, after a recession, certain segments of the economy resume growth while the others lag behind.

Also read: What inflation in 2022 will teach us about capitalism

What is the way out? First, the government must recognise the extent of damage to the informal sector economy and then extend benefits to them accordingly, in the upcoming Union Budget. This has been demanded by many states in their pre-Budget meeting with Union Finance Minister Nirmala Sitharaman. The government has been able to garner tax revenue resources even in the pandemic year.

While most of it should be channelled to infrastructure development, especially in the health and education sectors, a part of it should also be used in ameliorating the pains of informal sectors of the economy. A lot of government efforts have gone into making the tax kitty robust. It remains to be seen if it is utilised for capital expenditure or assembly elections in the seven states take away a major chunk. The BJP is in power in six of the seven poll-bound states and would like to retain all of them even if the government has to take some loose fiscal steps.

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