IAS Gyan

RStv

INDIAN ECONOMY: GROWTH PROSPECTS 2022 & BEYOND

16th January, 2022

PERSPECTIVE - INDIAN ECONOMY: GROWTH PROSPECTS 2022 & BEYOND

Context:

  • The Indian economy is expected to grow 6.5% in the current financial year ending March 2022.
  • This according to the United Nations’ ‘World Economic Situation and Prospects 2022’ report.

 

Details:

  • India’s economic recovery is on a “solid path” amid rapid vaccination progress, less stringent social restrictions and still supportive fiscal and monetary stances.
  • Further, the GDP is expected to expand by 6.7 per cent in 2022 after a 9% expansion in 2021, as base effects wane.
  • At the same time, the report also cautions that while robust export growth and public investments underpin economic activity in the country, high oil prices and coal shortages could put the brakes on economic activity in the near term.
  • It will remain crucial to encourage private investment to support inclusive growth beyond the recovery.
  • It added that while still vulnerable, India is in a better position to navigate financial turbulence compared to its situation during the "taper tantrum" episode after the 2008-2009 global financial crisis.
  • This is due to a stronger external position and measures to minimise risks to bank balance sheets. In the medium-term, scarring effects from higher public and private debt or permanent impacts on labour markets could reduce potential growth and prospects for poverty reduction.
  • In India, inflation is expected to decelerate throughout 2022, continuing a trend observed since the second half of 2021 when relatively restrained food prices compensated for higher oil prices.
  • A sudden and renewed rise in food inflation, however, due to unpredictable weather, broader supply disruptions and higher agricultural prices, could undermine food security, reduce real incomes and increase hunger across the region.

 

Global scenario:

  • The United Nations forecast lower global economic growth for 2022 and 2023, saying the world is facing new waves of COVID-19 infections, persistent labour market challenges, lingering supply chain issues and rising inflationary pressures.
  • The UN said that after expanding by 5.5 per cent in 2021 -- the highest rate of global economic growth in more than four decades -- the world economy is projected to grow by only 4 per cent in 2022 and 3.5 per cent in 2023.
  • Last year's robust recovery was largely driven by consumer spending, some increase in investments and trade in goods surpassing levels before the COVID-19.
  • But the momentum for growth slowed considerably by the end of 2021, including in big economies, like China, the European Union and the United States as the impacts of monetary and financial stimuli from the pandemic began to recede and major supply chain disruptions emerged.
  • Without a coordinated and sustained global approach to contain COVID-19 that includes universal access to vaccines, the pandemic will continue to pose the greatest risk to an inclusive and sustainable recovery of the global economy.
  • Labour shortages in developed economies are adding to supply chain challenges and inflationary pressures.
  • Growth in most developing countries and economies in transition has generally been weaker.
  • While higher commodity prices have helped countries reliant on commodity exports, rising food and energy prices have triggered rapid inflation, particularly in the nine-member Commonwealth of Independent States and in Latin America and the Caribbean.
  • Recovery has been especially slow in tourism-dependent economies, notably in the small island developing states.
  • World bank downgraded its forecast of worldwide economic growth to 4.1 per cent this year from the 4.3 per cent growth it was forecasting last June. It blamed continuing outbreaks of COVID-19, a reduction in government economic support and ongoing bottlenecks in global supply chains.

 

What is India’s economic outlook by other important institutions?

  • The Conference Board, a research group based in New York, says that India’s growth rate could touch 8.5%, an impressive rate amid the ravaging Covid-19.
  • The World Bank data, on the other hand, suggests that India’s economy will grow by 8.3 per cent in the fiscal year ending March 2022, unchanged from the June 2021 outlook. The forecast for FY2022/23 and FY2023/24 for India has been upgraded to 8.7 per cent and 6.8 per cent, respectively, reflecting higher investment from the private sector and in infrastructure, and dividends from ongoing reforms, according to its latest Global Economic Prospects report.

 

Two scenarios of economic projection:

Positive outlook:

  • Accelerated rates of vaccination and substantially reduced mobility restrictions have improved consumer confidence. Once demand kicks in from one section of the population, it will likely result in a virtuous cycle as businesses will have to ramp up spending
  • The pandemic has increased the pace of digitization with businesses ramping up their online presence to survive. This trend is likely to continue even after the pandemic is over and will aid in improving the efficiency and productivity of labor and capital.
  • Telecommuting, e-commerce, hybrid workplaces, and digitization are expected to evolve rapidly, reshaping consumer preferences and, therefore, business operations.
  • Besides, the impact of higher spending on infrastructure, government schemes (such as production-linked incentives and self-reliance) and digitization will start kicking in from 2023, leading to stronger externalities, higher productivity, and greater efficiencies—all leading to accelerated economic growth.
  • High demand and supply, along with strong exports, will give the government the space to gradually consolidate its position over the next few years
  • Asset monetization and stronger capital inflows will further aid the government in reducing its expenses and improving the fiscal deficit.

Pessimistic outlook:

  • Downside risks, such as rapidly mutating virus and reduced effectiveness of vaccination leading to intermittent local lockdowns.
  • Furthermore, muted demand, supply chain inefficiencies, and poor business confidence will cause sporadic and unsustainable growth spurts over the next two years.
  • The recovery, nonetheless, is unlikely to be smooth and equal—some sectors and segments of the population will see a relatively gradual recovery than others.
  • Several factors could potentially set back growth prospects.
  • A surge in infections.
  • Inflation—the biggest risk
  • Global supply chain disruptions and travel restrictions.
  • Crude oil prices have been steadily rising.
  • Risks of capital outflows.
  • Domestic investments in India have been low for over a year now.
  • Job creation has been an Achilles’ heel for India, and the pandemic has created a highly fragmented job market
  • Nonperforming assets
  • Inefficient utilization of demographic dividend

 

Way forward:

  • In this fragile and uneven period of global recovery, the World Economic Situation and Prospects 2022 calls for better targeted and coordinated policy and financial measures at the national and international levels.
  • The time is now to close the inequality gaps within and among countries.
  • Without a coordinated and sustained global approach to contain COVID-19 that includes universal access to vaccines, the pandemic will continue to pose the greatest risk to an inclusive and sustainable recovery of the world economy.
  • The government must focus its resources on capital investment, for example, on physical infrastructure, skill-building, and improving public health and other social infrastructure, as the country learns to live with the pandemic.
  • These expenses should be financed through sustained efforts toward monetization of assets and attracting investments.
  • The other area of focus must be enabling the ecosystem around job, income, and demand creation. India is a domestic demand–driven economy and needs demand to sustainably pick up for a strong recovery.
  • Since MSMEs are India’s largest job creators, the government will have to identify their pain areas, and devise a solution that helps them become a part of “Aatmanirbhar Bharat.”
  • Government must focus on short- as well as long-term measures to boost exports and encourage foreign direct investment in sectors where India has a competitive advantage
  • Government must be cautious of future variants and likely adopt a calibrated response through intermittent regionalized mobility restrictions.

 

https://youtu.be/7aciHnXKh_U

https://www.un.org/development/desa/dpad/publication/world-economic-situation-and-prospects-2022/

https://www.business-standard.com/article/international/un-forecasts-lower-global-economic-growth-for-2022-and-2023-122011301656_1.html

https://economictimes.indiatimes.com/news/economy/finance/indias-economy-recovery-on-solid-path-amid-rapid-vaccination-progress-forecast-to-grow-6-5-per-cent-in-fy-2022-un/articleshow/88883041.cms

https://economictimes.indiatimes.com/news/economy/indicators/world-bank-retains-indias-economic-growth-forecast-at-8-3-for-2021-22/articleshow/88854379.cms

https://indianexpress.com/article/opinion/columns/india-economic-outlook-in-2022-7712227/

https://www.oecd.org/economy/india-economic-snapshot/

https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/WESP2022_web.pdf