E-Paper
What challenges does the new fiscal bring for the Indian economy?
The 2022-23 fiscal year begins today
The 2022-23 fiscal year begins today. How was 2021-22 for the Indian economy? And what will 2022-23 bring for the economy? Here are four charts that try to answer this question.
The growth challenge has changed from 2021-22 to 2022-23
The biggest question, as far as growth was concerned in 2021-22, was whether India’s GDP would regain pre-pandemic levels. GDP data for 2021-22 (to be sure, these are the second advance estimates) suggest that it will. With an expected growth rate of 8.9% in 2021-22, India’s GDP is likely to be 1.8% more than what it was in 2019-20.
If regaining pre-pandemic levels was the biggest challenge for the Indian economy in 2021-22, its biggest challenge in 2022-23 is going to be to return to a high growth trajectory. As the new financial year begins, there is greater uncertainty on this question, not just because of difference in assessment of the economic situation at hand but also due to the ongoing geopolitical crisis which is fuelling a surge in global commodity prices, especially crude oil.
In its February 2022 meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India projected GDP growth for 2022-23 to be 7.8%, with quarterly growth numbers being 17.2%, 7%, 4.3% and 4.5%. The January 2022 update of IMF’s World Economic Outlook (WEO) projected India’s 2021-22 and 2022-23 growth rates to be 9%. Both RBI and IMF will come out with a fresh set of growth projections in April 2022.
See Chart 1: India GDP growth
Global growth tailwinds are likely to dissipate
“Global financial market volatility, elevated international commodity prices, especially crude oil, and continuing global supply-side disruptions pose downside risks to the outlook,” RBI’s MPC said in its resolution after its meeting on February 10, 2022.
Two weeks after that, Russia invaded Ukraine creating a huge disruption in commodity markets. An IMF blog published on March 15, 2022 underlined the economic problems which the Russia-Ukraine crisis will create. “Beyond the suffering and humanitarian crisis from Russia’s invasion of Ukraine, the entire global economy will feel the effects of slower growth and faster inflation”, it said, adding that the impact will be mainly on account of three factors -- higher commodity prices, economic disruption in neighbouring countries due to disruption in supply chains, remittances and inflow of refugees, and reduced business confidence and heightened policy uncertainty.
The October 2021 edition of IMF’s WEO downgraded global growth forecast for 2022 by 10 basis points – one basis point is one hundredth of a percentage point – to 4.9% from its July 2021 forecast. There was another downgrade in the January 2022 update and it was brought down to 4.5%. It is likely that there will be a further downgrade in April. This will also mean headwinds for India’s growth prospects, especially from the export route.
See Chart 2: Global GDP growth
How big will the inflation pain be?
Inflation is perhaps the biggest uncertainty in the new fiscal year. When the ministry of finance presented its Economic Survey on January 31, 2022, it assumed that crude oil prices will remain in the range of $70-75 per barrel. The average price of India’s crude oil basket (COB) has been $97.1 and $108.7 in January and February 2022 and the number is expected to be much higher in March. While India is expecting to mitigate some of the crude price hike by sourcing cheaper oil from Russia (much will depend on the volume), a prolonged period of high crude prices is likely to upset the budgetary math of the government and also eat into purchasing power of the common people.
To be sure, the government is still hopeful that prices pressures will weaken sooner rather than later. “The impact (of high crude prices) will depend not only on the level of oil price but also on its persistence. We must remember that the new financial year hasn’t yet started. It is possible that oil prices will settle down in a range that is tolerable for us,” Chief Economic Advisor (CEA) V Anantha Nageswaran told Bloomberg Quint in an interview on March 30.
While a future decline in prices is in the realm of uncertainty, managing inflation expectations is going to be a difficult challenge for policymakers. Not only are inflation expectation levels of households significantly higher than their historic standards, the sharp increase in fuel prices after the end of the assembly election cycle – the prices of petrol and diesel in Delhi have increased by ₹6.4 per litre between March 23 and March 31 – is likely to lead to further increase in the inflation expectations of households.
See Chart 3: Inflation expectation of households
The elephant in the room: Inequality
“I want to highlight one point on capacity utilisation. It is true that average level of capacity utilisation is not at a point where they would require additional capacity, but if you really look at the top four companies in key sectors like steel, cement, and chemicals, their capacity utilisation is much higher; it is 75-80%”, Nageswaran said in the interview to Bloomberg Quint.
The CEA’s observation underlines what a lot of economists have been arguing about the Indian economy. That the post-pandemic recovery has favoured the relatively well-off -- both at the level of firms and households -- and seems to have ignored other stakeholders. In a research note issued on March 28, HSBC India chief economist Pranjul Bhandari drew attention to this issue.
“Not all firms will be equally impacted by the oil price shock. We find that large firms have outperformed small firms through the pandemic, gaining market share and being more profitable. They are also likely to weather the oil price shock better, having become more energy efficient over time and having more bargaining and pricing power than small firms. Even before small firms had fully recovered from lockdown-led-disruption, they were disproportionately hit by higher commodity prices. This has even forced some small manufacturers to shut shop in recent months”, she wrote. “It’s not just the large firms that have done well, it’s also their employees. Staff costs of large firms have risen meaningfully, while those of small firms have stagnated.”
A majority of India’s workers does not work in big companies. So, unless this trend is reversed, restoration of mass demand will continue to be a challenge in 2022-23.
See Chart 4: Large firms have taken away market share from small firms
