Which are the factors will shape Indian economy in 2022
We should be cautiously optimistic despite Covid with GDP and inflation rising, central banks around the world may hike interest rates leading to instability in financial markets.
3rd wave of the Covid-19 pandemic has hit India and its surging fast. But there is hope that it will be milder and shorter, and the Indian economy will continue to show the growth momentum it has shown over the past few months.
Higher economic growth in 2022-23
The growth in gross domestic product (GDP) is expected to be higher in the 2022-23 fiscal. Incomes and output will rise not only because of the low base effect but also due to the recovery in business expectations and the anticipated improvement in both global and domestic demand. While the first few weeks of this year appear to be difficult due to the Omicron-led third wave, the following months are expected to see recovery getting back on track. While the Omicron variant is highly transmissible, it has been seen to be less severe as compared to the previous variants. With improving vaccination rates, herd immunity and our ability to cope, the damage to life and livelihoods is likely to be limited.
By the end of 2021, over 61 % of the adult population had received both doses of the vaccine and about 90 % of the adult population had been given a single dose of the vaccine. Vaccination of teenagers has begun. The third dose of vaccination for healthcare workers and those above 60 years with co-morbidities is being rolled out. High vaccination rates will enable greater mobility and support demand recovery.
Given the uncertain nature of the virus, there could be some downside risks to growth, especially to contact intensive sectors, but these are likely to be restricted to the first few months of the year. Higher capital expenditure, push to infrastructure through the new institutional framework, boost to the manufacturing sector and buoyant exports are likely to be the key drivers of growth.
1. High inflation
Inflation in advanced economies and emerging market economies has surged to record levels. The trajectory in India will be influenced by global headwinds such as elevated commodity prices, global logistics, supply side bottlenecks and prices of industrial raw materials.
The Wholesale Price Index (WPI)-based inflation, which captures these global factors, rose to a record high at 14.32 % in November 2021. The Consumer Price Index (CPI)-based retail inflation for November also spiked to 4.91 %. But the wide gap between WPI and CPI reflects price pressures on the wholesale side, which is likely to be passed on to the retail level in the coming months. Several firms, particularly in the consumer goods sector have hiked the prices of their products due to rise in input costs. Cost push pressures are likely to weigh on core inflation in the coming months.
Further restrictions could lead to supply-side disruptions and add to inflationary pressures in early months of 2022. As supply disruptions ease and demand normalises, inflation could see moderation during the course of the year. RBI has projected CPI inflation at 5.7 % for the January-March quarter. For the first half of the next fiscal year, inflation is projected to be at 5 %.
2. Volatile interest rates
The RBI has embarked on a normalization of eased monetary policy undertaken since March 2020 to mitigate the distress due to the pandemic. While the RBI has kept the repo and reverse repo rate unchanged in its recent policy announcements, policy normalization has begun through other measures such as the variable rate reverse repo auctions and sale of government securities. These actions have led to absorption of liquidity and have driven the short-term rates closer to 4 %. Short-term rates are expected to rise further in the coming months as the RBI will continue with policy normalization amid elevated inflation.
Rates on long term bonds are at elevated levels driven by higher yields on US bonds and higher domestic inflation. The path of the long term yields will further depend on the fiscal situation. Yields on 10-year bonds are likely to climb further if the government targets a higher borrowing programme for the next fiscal.
3. Choppy financial markets
The year 2021 yielded massive returns for stock market investors. Improved profitability of companies, increased participation by retail investors, and a series of initial public offerings (IPOs) drove the rally in the market. Global factors like the US Federal Reserve’s taper announcement and interest rate hikes along with risk from the Omicron variant are likely to cause volatility in markets. Foreign investors’ exposure to Indian assets and US dollar movement will also impact the market direction in the coming months.
4. NPA growth in banking
The RBI’s Financial Stability Report last week noted that banks have remained resilient amid the pandemic, cushioned by policy support. Bad loans across banks fell to a six-year low of 6.9 % in September 2021. The capital position of banks has also seen substantial improvement. However, with the unwinding of policy support, the balance-sheets of banks may come under stress. Emerging signs of stress are visible in the micro, small and medium enterprises and personal loans segments. The report projects non-performing assets (NPAs) to rise to above 8 % by September under the baseline scenario. State-owned banks are likely to see a steeper jump in bad loans. They may also require higher capital to deal with the emerging stress being faced by some categories of borrowers. It may also make banks more cautious lenders.
5. Some sectors are struggling more than others: The economic impact of the Covid-19 second wave has started taking a toll on many sectors. Hospility, Tourism, Aviation & Travel, Art, Entertainment & recreation, Administrative & support services, MSME Sector
6. Unemployment remains high
7. Private consumption is low.
8. Disruption in Global supply chain & logistics with shortages of containers, higher shipping costs & longer waiting period is adversely impacting Exports.
In conclusion, with both GDP and inflation rising, central banks around the world, including the RBI, may hike interest rates leading to instability in financial markets. 2022 is expected to bring both hope and caution.