Date: 31/01/2022 Platform: Times of India
Eco Survey shows growth & stability indicators are healthy. Now we just need a clear road
The last two years have been very difficult for the world economy due to the Covid pandemic. After a significant decline during the national lockdown, followed by a sharp revival, the economy experienced a much shallower slowdown during the “second wave” of April-June 2021. Since then it has witnessing a sustained recovery even if Omicron may have impacted some sub-sectors in January 2022. Most high-frequency indicators like GST collections, freight traffic, e-way bill generation, and fuel consumption broadly follow the above trends. This year’s Economic Survey argues that a combination of responsive policy-making and supply-side reforms place India in a good position to generate strong growth in 2022-23.
According to advance estimates, GDP has climbed past pre-Covid levels with growth registering 9.2% in 2021-22 after a contraction of 7.3% in 2020-21. Agriculture was the least affected sector but output in most segments of industry and services are also above the pre-pandemic level of 2019-20. However, the recovery is still not complete for contact-intensive sectors such as travel and tourism. Thus, the sub-sector ‘Trade, hotels, transport, and communications” in national accounts remains 8.5% below pre- pandemic levels of activity.
Restrictions on contact-intensive services are unavoidable as long as serious health concerns persist. The good news is that, over the course of a year, India delivered 157
crore doses that covered 91 crore people with at least one dose and 66 crore with both doses. The vaccination process for boosters and for the 15-18 year age group is also gathering pace. With vaccination having covered the bulk of the population, and economic momentum in its favour, this year’s Economic Survey forecasts that the Indian economy is in a position to witness GDP growth of 8.0-8.5% in 2022-23. This would make India the fastest growing major economy in the world. The IMF’s latest forecast, released on January 25, is even higher at 9%.
Nonetheless, the global environment still remains uncertain with high inflation in many countries, spikes in energy prices, global supply chain disruptions, and financial liquidity likely to be withdrawn by major central banks. This is why it is important to look at India’s macro-stability indicators and their ability to provide a buffer against these stresses.
India’s balance of payments remained in surplus throughout the last two years despite swings in both capital and current accounts. This allowed sustained accumulation of foreign exchange reserves, now at $635bn - equivalent to 13.2 months of imports. The current account deficit remains small despite a surge in imports because both merchandise and services exports have also done well. Thus, India’s external sector sustainability indicators look much stronger than during the global financial crisis 2007-09 or the “taper tantrum” episode of 2013.
Similarly, the banking system is well capitalised and non-performing assets (NPAs) seem to be steadily declining. The gross NPA and net NPA ratios declined from 11.2% and 6% respectively in 2017-18 to 6.9% and 2.2% at end-September 2021. Meanwhile, there has been record mobilisation of risk capital by Indian companies, with Rs 89,066 crore raised via IPOs in April-November 2021.
On the fiscal front, support given to the economy as well as to the health policy response caused the fiscal deficit and government debt to rise sharply in 2020-21. However, revenue collections have been very strong for both direct taxes and indirect taxes in 2021-22. Thus, both fiscal and primary deficits declined for April-November 2020-21 despite sustained spending on health and infrastructure.
Meanwhile, inflation has reappeared as a global issue in both advanced and emerging economies. In India, consumer price inflation remains within 2-6% target range. However, wholesale price inflation has been running in double-digits. This is partly due to a low statistical base but there is a need to be wary of imported inflation, especially from elevated global oil prices.
Despite healthy macro-stability indicators, the one lesson of the last two years is that we should be ready for the unexpected. As the Economic Survey explains, the key reason that the Indian economy was able to navigate these turbulent times was a “barbell” response strategy that combined safety nets to support the vulnerable on one hand, and a flexible ‘Agile’ framework that used feedback-loops and real-time responsiveness on the other.
The same barbell strategy was used to roll out a slew of supply-side reforms. On one hand, measures like deregulation, process simplification, production-linked incentives, privatisation, and infrastructure investment have been use to boost the efficiency and competitiveness of the Indian economy. At the same time, the Atmanirbhar Bharat framework is being used to build India’s resilience to global supply-chain disruptions by encouraging indigenous innovation as well as domestic production of key inputs like chips and pharmaceutical ingredients. It should be clear that Atamanirbhar Bharat is not a return to socialist-era import-substitution.
To conclude, the Indian economy is in a good place — macro-indicators are reasonably healthy and the growth engine looks primed to deliver the world’s highest growth rate. Of course, unexpected headwinds from geo-political developments and spikes in energy prices remain a risk. This is why the biggest strength of the Indian economy is the policy willingness and administrative capacity to adapt to new situations, as demonstrated in the last two years.
The writer is Principal Economic Adviser, GoI. Views are personal