Indian Economy Outlook seems resilient

?INDIAN ECONOMY STATUS AS PER THE PROBLEMS BEING FACED GLOBALLY

As soon as global people and the Government have just taken a sigh of relief?from the devastation done by the COVID-19 pandemic and were starting to lessen its destruction and uncertainties, ?the Russia- Ukraine war crisis deteriorated the global economy badly in the form of rising prices of food and energies, raised inflation, cost of borrowing abnormal griping EU countries most and the entire world with different level of intensity of its effect. Accordingly, India’s growth outlook looks blurred which spiked the crude oil prices above US$100 per barrel, wheat and cereal prices have also stocked, and steep devaluation of the rupee against the dollar. All of which are critical imports from the two warring nations. India also partly meets its fertilizer needs from the region. For India, which has been battling inflation for a while now, this situation is making matters worse. Higher fuel and fertilizer prices will reduce government revenues and increase subsidy costs. Furthermore, capital outflows and rising import bills will weigh on the current account balance and currency valuation.

Despite the external shocks, India’s underlying economic fundamentals are strong and despite the short-term turbulence, the impact on the long-term outlook will be marginal. Because of the heightened uncertainties during January—March 2022, the surge in the Omicron variant, and the war, ?growth projections will be slightly lower, but growth will be strong in the next two quarters as positive steps, like, the growth-oriented policies and schemes, increased infrastructure expenditure, the surge in exports, swift digitization, and cascading effects of geopolitical developments will probability in growing.

?Will we sustain rapid growth beyond FY23?

Investment and consumption must spurt for the economy’s base effect not to cause a deceleration in view of the last two years of quick expansion.

Following a 6.6% contraction in the real gross domestic product (GDP) in 2020-21, the Central Statistics Office (CSO) has provisionally estimated that headline growth in 2021-22 recovered smartly to 8.9%. Further, in its April 2022 World Economic Outlook, the International Monetary Fund (IMF) projects that India would grow at 8.2 % in 2022-23 and 6.9 % in 2023-24. (For comparison with other countries, the IMF’s growth estimates for India during the calendar years 2022 and 2023 are 8.9% and 5.2% respectively). The IMF expects India to be the fastest growing major economy during all three years. However, it is to be seen that the “V-shaped recovery" that has an extensive boost to the uncertain Indian economy back on track. The headline numbers need to be seen in perspective. They derive from the base effect of two successive years of sharp decline: growth of 3.7% in 2019-20 and shrinkage of 6.6% in 2020-21, when the economy reeled under the shock of a stringent covid lockdown. When this base effect is factored in, the numbers show that in real terms, India’s GDP last fiscal year was just 5.7 % higher than what it was in 2018-19, yielding an average annualized growth of just 1.9% over that three-year period.

Overall observation

A V-shaped recovery generally takes place if regains output loss. The IMF’s latest projections for our economy, however, translate into a permanent output loss of 4.9% over four years on an estimated conservative drift/likely growth rate (the average of the two years preceding the pandemic) of 5.1 % per annum. The World Bank’s estimates of 8% and 7.1% respectively point to a similar output loss. Gainsay, ?just the latest assumptions by the Organization for Economic Cooperation and Development (OECD) of 6.9% and 6.2% work out a higher output loss. It is important the determination of output loss is complex to the potential or trend-growth estimate. As this is a moving target, it is difficult to calculate. The baseline of 5.1% used above includes 2019-20 when growth was well below potential (3.7%). India’s average growth during the five years preceding the covid outbreak (2015-19) was 6.6%. If this is taken to be India’s potential/trend GDP growth rate, the output loss is 12.6%. It is broadly supposed that India’s GDP growth was overrated under the revised GDP series, as it was not supported by a host of alternative indicators powerfully correlated with growth. If the five-year average is lowered from 6.6% to 6%, the estimated permanent output loss comes to 9.5%, This is among the highest in G-20 economies. Considering, ?this big loss in output and growth potential in recent years is reflected in measurements of economic activity that are strongly interrelated to growth. At the same time, unemployment rates swing, as people keep exiting or entering the labor market, a more robust and durable medium-to-long-term measure of employment trends in the country’s labor force participation rate. Data from the Centre for Monitoring Indian Economy reveals a secular decline from 47.7% in January 2016 to 41.9% in March 2020, and further to 40.19% in April 2022. The number employed has not risen in complete terms since January 2016, even as our population, and consequently the labor force, has increased. It is an alarming signal More worrisome is that at over 30%, India’s youth neither employed nor in education or training is twice the G 20 average.

?An array of prime economic activity indicators monitored by the CSO also show that except for rice production, the external sector, metallic minerals, and railway freight, the average annualized growth over the last three years (2019-20 to 2021-22) was below 3% per annum. Several indices are still to recover to pre-pandemic levels. While comparing these growth rates with GDP numbers, unlike GDP, some of these indices are not adjusted for inflation. National income is estimated by the CSO by both income and expenditure methods. An analysis of both trends can show a more reliable indication of the bases of growth. The income method indicates that the agricultural sector weathered the pandemic well, growing at an average annualized rate twice that of GDP. Other sectors did not. Trade, hospitality, and transport communications had an average annualized negative growth of 1.9%. as these suffered the most from covid-related restrictions. Financial and real estate sectors and also public administration and defense kept increasing over twice the GDP growth rate, but only a thin leading at the top benefited directly from this. The expenditure method tells us a lot about our economy’s engines of growth. Over the last three years, government expenditure has been the prime vehicle, as its average annualized growth was twice that of GDP. Private consumption, investment, and exports grew at roughly the rate of our economy as a whole. Both investment and exports, however, staged a smart recovery in 2021-22 after many years of stagnation and decline. India’s possible growth was dropping abruptly in the pre-covid period. It grew at an average of 7.7% over 14 years between 2003-04 and 2016-17, as all three growth engines, namely exports, investment, and consumption were shooting. But growth started to decline as the export and investment engines started splattering. The third engine, private consumption, also started waning over the last three years with the covid pandemic. Thus, based on average long-term trends and averages, India’s current improvement in growth is not V-shaped. Several years of declining growth appear to have reduced the growth prospects amid the dependence of the state of a system on its history. Thus, it is hard for the Indian economy to grow at an average above 5% in the foreseeable future unless the green sprouts visible in investment and exports in 2021-22 are continued and private consumption recoils. Going forward, growth also faces strong headwinds from high oil prices, monetary tightening in the US, worsening fiscal imbalances, a stagflation environment, and rising interest rates.

?Unemployment status

?The country's unemployment rate has surged to ?7.80 percent in June 2022 having job loss of 13 million, mainly in the agriculture sector, according to the data released by the economic think-tank Centre for Monitoring Indian Economy (CMIE). The immense fall in the number of jobs last month was triggered by a higher unemployment rate in rural areas, which reached 8.03 percent from 6.62 percent in May 2022. CMIE data shows that in urban areas, it was a tad better at 7.30 percent compared to 7.12 percent recorded in May 2022. CMIE managing director Mahesh Vyas remarked: "This is the biggest fall in employment during a non-lockdown month. This is basically a rural phenomenon and seasonal. However, this is a seasonal phase when there is a lull in agricultural activities in rural areas and it is most likely to be reversed in July 2022 as soon the sowing begins," He said, while 13 million lost jobs during the reporting month, the count of the unemployed increased by only 3 million. The rest exited the labor markets as the labor force shrunk by 10 million. The fall was located mainly in the informal markets and it is possible that this is largely a labor migration issue and not an economic malady. It is worrisome that such large swathes of labor are so vulnerable to the vagaries of the monsoon. The other concerns data point is that June 2022 saw a fall of 2.5 million jobs among salaried employees. "June also exposed the growing vulnerability of salaried jobs. The government shrunk the demand for armed personnel and opportunities in private equity-funded new-world jobs also started to shrink. The rain god cannot save these jobs. The economy needs to grow at a faster pace than it may in the near future to save and generate such jobs," he added. The highest rate of unemployment was witnessed in Haryana at 30.6 percent followed by Rajasthan at 29.8 percent, Assam at 17.2 percent, Jammu and Kashmir at 17.2 percent, and Bihar at 14 percent, the data stated. India's growth depressed at a seven-year low, as six of the eight broad indicators applied for GDP?size fretted in the first quarter ended June 2022 over last year. The raised input prices and expected pass-through risks interrupt growth. Growth momentum in the Indian economy remained slow, with the Q4 FY 2022 GDP growth slowing down by 4.1 percent from the previous quarter, partly due to the temporary restrictions that were imposed to contain the spread of the Omicron variant in January 2022. The near-term growth also remains soft, with uncertainties emerging from the ongoing geopolitical conflicts, weakening global demand, limited scope for incremental government spending, and tightening financial conditions. It is pacified by the GDP growth for the entire FY 2022 stood at 8.7 percent. Most of the experts, however, have maintained their estimates of GDP growth for the entire FY 2023 between 7 to 7.3 percent.

Still, the year ahead seems difficult and is troubled with doubts emanating from the geopolitical developments and consequent impact on commodity prices, especially crude oil. The recent fiscal measures on excise duty and food import and export-related measures should partly improve the corroding purchasing power of consumers. However, continued elevated input prices and the expected spill-over risks are interrupting growth. The key challenges would be a weakness in consumption demand given the impact of cost-push inflation and weakness in the broader labor market, delayed pickup in private sector investment given relatively weaker demand visibility along with the increasing cost of borrowing, the limited ability of central and state government's expenditure on public infrastructure, and weakening global growth. This implies a protracted shortage of critical inputs, higher costs, shrinking corporate profitability, and demand curbing global policies. This will exert pressure on India's domestic growth story, which is yet to be broad-based and still lacks the next lever of secular growth. The growth lurched in manufacturing, partly due to supply chain disruptions and sequential easing in corporate profitability, driven by rising input costs.

Investment has been the main driver of India's GDP growth during both the latest quarter and the last financial year. In contrast, consumption, both private and government, trailed investment. For the full year, the industry has grown faster than services while for the latest quarter services have grown faster than the industry. The speedier recovery of industrial activities and demand, coupled with the protected recovery of high-touch services led to this. On the other hand, net exports dragged down growth. Faster import versus export growth trimmed India’s GDP growth by an additional 200bps over usual. Containment of government consumption also depressed growth. From 8.7 percent growth in FY22, we expect the rate to come down to 7.5 percent in FY 2023 due to factors such as monetary and fiscal tightening, higher interest rates, supply disruption, and global slowdowns.

The Indian economy in fiscal 2022 was only 1.5 percent above the pre-pandemic level (fiscal 2020), compared with 1.8 percent estimated earlier. But the estimates for both private consumption and fixed investment estimates are a tad higher than before. The Peak impact of interest rate hikes on GDP will be felt only towards the end of this fiscal year. “Positive indicators such as high forex reserves, government’s continued focus on capital expenditure, and improved agriculture growth owing to higher realizations in cultivation income are expected to act as tailwinds that can support GDP growth and keep India one of the fastest growing major economy of the world in FY22-23. The slowdown in global growth elevated energy prices, rising interest rate cycles and tightening of financial conditions will be key headwinds.

??The industry chamber FICCI called it an “indicator of inherent resilience”. Senior vice president of FICCI, Subrakant Panda, said, “India’s GDP growth of 8.7 percent for financial year 22 versus a contraction of 6.6 percent previous fiscal comes despite two Covid waves during the year and persistent global supply chain disruptions. It is an indicator of inherent resilience and sustained economic recovery.” The real estate industry, which suffered a setback last year, is on its revival path recording a growth of 4.2 percent in 2021-22 as against 2.2 percent (last year).

?CONCLUSION

The world has been overwhelmed by the fallout of geopolitical conflict, which threatens to snuff out a recovery that was hesitantly and haltingly making its way through multiple waves of the pandemic and multiple mutations of the virus. India’s economic prospects are also challenged by these ongoing developments, and the outlook is darkened and highly uncertain. How the RBI is navigating this tsunami in its endeavor to shield the Indian economy and secure its tryst with a brighter future. In spite of the Omicron-driven third wave, India was decoupling from the rest of the world and fashioning a gradual but strengthening course of recovery. Projections made by the International Monetary Fund (IMF) just a month ago showed India poised to grow at the fastest pace year-on-year among major economies. In that meeting, the RBI projected real GDP growth at 7.8 percent for 2022-23. CPI inflation was projected to average 4.5 percent, benefiting from the softening of food prices at that time on improving prospects for food grains production, the imminent arrival of the winter crop, and strong supply side interventions. The world changed after the escalation of geopolitical tensions into war from late February 2022 delivered a brutal blow to the global economy, battered as it had been through 2021 by the pandemic, supply chain and logistics disruptions, elevated inflation, and bouts of financial market turbulence triggered by diverging paths of monetary policy normalization. Since then, the global macroeconomic outlook has become suddenly overcast with the economic costs of the war and retaliatory sanctions. Emerging market and developing economies (EMDEs) are bearing the brunt of these geopolitical spillovers. Capital outflows and currency depreciations have tightened external funding conditions, and along with elevated debt levels, put their hesitant and incomplete recoveries in danger. Heightened volatility in financial markets and surges in prices of commodities - especially energy, metals, grain futures, and fertilizers – has accentuated risks to growth, inflation, and financial stability.

. The war in Europe and its fallout as ‘tectonic shifts’, little realizing that these words would be forerunners to descriptions of the global outlook in terms of extreme weather conditions. We are confronted with new but humungous challenges – shortages in key commodities; fractures in the international financial architecture; and fears of deglobalization. Extreme volatility characterizes commodity and financial markets, the conflict in Europe has the potential to derail the global economy.” In a span of two months, the projection of real GDP growth was revised downwards by 60 basis points to 7.2 percent for 2022-23 while the CPI inflation projection for the year was raised by 120 basis points to 5.7 percent. These adjustments to the projections can be regarded as the first authentic assessment of the toll that geopolitical spillovers are expected to take on the Indian economy. By June 2022, it was clear that risks were materializing faster than anticipated in inflation prints, with three-fourths of the consumer price index (CPI) under siege. The inflation projection for 2022-23 was raised by another 100 basis points to 6.7 percent.

Although India’s merchandise exports have stayed above US$ 30 billion over the past 15 months, there has been a moderation in pace in May 2022, reflecting the renewed supply chain disruptions in the wake of the war. Even after, India registered robust growth in manufacturing export orders. Import growth is broad-based, taking the trade deficit to its highest monthly level in May 2022, but this is an indication that the recovery in domestic economic activity is gathering strength. Seen in the broader context of the balance of payments – which is a summary record of all of India’s external transactions – the decline in India’s current account deficit (CAD) to 1.5 percent of GDP in the fourth quarter from 2.6 percent in the third quarter of 2021-22 augurs well for India’s external viability as it is backed by strong merchandise export performance, rising net earnings from computer and business services and rejuvenation of remittances by overseas Indians from pandemic lows. On an annual basis, therefore, the CAD turned out to be a modest 1.2 percent of GDP in 2021-22, with the intrinsic strength of India’s foreign exchange earnings mitigating the terms of trade shocks imposed by geopolitical spillovers and the surge in import demand.

With food grains production touching a record level for the sixth consecutive year in 2021-22, food security has been bolstered amidst widespread global shortages. As of May 31, 2022, the stock of rice and wheat stood at 3.7 and 4.2 times the quarterly buffer norms. Minimum support prices (MSP) for 14 major Kharif crops for the marketing season of 2022-23 have been announced, but upward revisions have been modest, averaging 6.1 percent, which is a positive for the inflation outlook.

In the industrial sector, the headline manufacturing purchasing managers’ index (PMI) maintained its improvement in May 2022, turning out to be among the highest in the world. While the expansion was led by an increase in factory orders and sales, the increase in input cost pressures remains a point of concern. The PMI services accelerated in May 2022, marking a solid recovery. The business expectations index (BEI) for services expanded for the tenth successive month, but it was also accompanied by large increases in input prices. It will build it into price mark-ups, wage negotiations, rents on houses, transportation costs and the prices of services more generally such as personal services like housekeeping, medical and education fees, entertainment and bus, train, and auto fares. With households accounting for close to 60 percent of India’s GDP in the form of private consumption expenditure, this will mean that inflation will become entrenched in the Indian psyche.

The monetary policy action is not without consequences. It will take its toll on spending and demand. That is the price of stability. What the RBI is trying to do is to stabilize the price situation when the economy is able to bear it because, in the longer run, price stability is beneficial for growth. The RBI kept interest rates and liquidity conditions low and easy through all of 2020-21 and 2021-22. As a result, the Indian economy recovered from an unprecedented contraction of 6.6 percent in 2020-21 to a growth rate of 8.7 percent in 2021-22, including an expansion by 4.1 percent in the quarter January to March 2022 when several advanced and emerging economies either shrank or slowed. In the first quarter of 2022-23, available indicators of economic activity have improved. Unlike the rest of the world, India is recovering and getting resilient and stronger. This is the best time to put the stabilizing effects of monetary policy into action so that the costs to the economy are minimized.

CPI excluding food, fuel, petrol, diesel, gold, and silver (44 percent versus 47 percent of the CPI in the standard core) – and the weighted median CPI, a statistical measure of core inflation, are both showing generalization and momentum. This warrants monetary policy action to ensure demand does not exceed the available supply, even though both are not at full strength. If real GDP growth averages between 6-7 percent of GDP in 2022-23 and 2023-24, the recovery that is increasingly solidifying gets a fair chance of traction.