With a new year to be ushered in shortly, there is much anticipation about what lies ahead for Indian industry and India’s economy. The big question doing the rounds is whether the rebound in economic activity experienced after the debilitating second wave of the covid pandemic would be sustained; and if so, what would be the contours of the turnaround story to be scripted in 2022? Further, would the country retain its position as the fastest-growing economy in the world? And what would be the challenges to the growth process?
To begin with, the latest data print indicates that the economy is on the rebound after having shaken off the economic disruption caused by the second pandemic wave. India is among the few economies which has recorded impressive growth rates for four consecutive quarters even in the midst of a covid wave, signalling that the worst is behind us. We expect that, going forward, gross domestic product (GDP) growth will pick up rapidly and the momentum would be carried forth, culminating in robust growth of 9.5% or more in fiscal 2021-22.
The other positive factors that hold out hope in the new year include the continuing export boom, surge in tax revenues (notably of GST), improvement in manufacturing growth (as indicated by the purchasing managers index), shrinking pile of bad debts with banks, booming corporate profits, sustained growth in the country’s tally of unicorns and impressive inflows of foreign investment.
Further, India has administered about 1.4 billion doses of vaccine to its population through timely interventions such Tika Utsav and allowing walk-in-vaccinations. The world’s most ambitious vaccination drive has strongly contributed to enhanced economic growth rates, besides protecting lives and livelihoods. Not surprisingly, the International Monetary Fund is optimistic about our economy and projects that India would retain the tag of the world’s fastest-growing economy, with annual growth poised to touch 8.5% in 2022. Some of the other growth drivers are elaborated below.
First, the impetus given by the government to enhance public investment would play a crucial role in reviving our economy. The government has taken concrete steps to boost its capital spending in areas such as infrastructure, its focus on which is underpinned by several initiatives. Apart from the National Infrastructure Pipeline, recently- announced Gati Shakti scheme to foster holistic infrastructure growth and National Monetisation Pipeline, we also have the National Bank for Financing Infrastructure and Development that aims to meet India’s infra funding requirements. All this should, in the process, crowd in private investment and rekindle a new demand cycle in the economy.
Already, the ratio of gross fixed capital formation to GDP at current prices has crossed 28% in the second quarter of 2021-22, which is higher than seen in the first quarter, indicating a rise in investments. The mood of industry is upbeat and there is renewed confidence that there would be a revival of investment and demand as we step into the new year.
The second major positive is an improvement in consumption spending due to the reopening of the economy, driven by an improved pandemic situation and the aforementioned vaccination drive. Another good sign is strong equity fund-raising, which has helped repair the risk capital that was eroded by the pandemic’s impact.
Third, a host of important reforms announced by the government has done much to reignite the growth momentum and would further lift investor sentiment. For instance, India’s production-linked incentive (PLI) schemes—aimed at making the manufacturing sector globally competitive and sustainable—comprise an important step towards fulfilling the country’s vision of an Atmanirbhar Bharat. As envisioned, the scheme should remove sectoral disabilities, create economies of scale and ensure efficiencies in domestic manufacturing, which in turn would help scale up growth.
Fourth, a favourable global economic environment and strong external demand will continue to strengthen our exports in the new year. Indian exporters are riding a tidal wave of global market growth. As a result, India is within striking distance of achieving its $400 billion export target for 2021-22. This dynamic export performance is expected to continue as global growth accelerates further in 2022, which would have a salutary impact on our GDP growth.
No doubt, there will be challenges ahead. A rise in global crude oil prices, proposed hikes in policy rates by the US Federal Reserve, growing protectionism among advanced economies and geopolitical uncertainties could contribute to volatility in the global and domestic economic landscape.
Although we face the global threat of new covid variants emerging (like Omicron), the extent to which our economy will be impacted in 2022 would depend on the protection against severity of illness afforded by universal vaccination of all adults with two doses and a booster. A lot would also depend on a calibrated and coordinated response so that the Centre and states ensure seamless supply chain continuity and free movement of people with strict covid-appropriate behaviour protocols, thereby minimizing the scope for disruptions of economic activity.
It is additionally heartening to note that the cycle of private investment is showing an upturn. A CEO poll carried out recently by the Confederation of Indian Industry of more than 100 top corporates showed that over 50-60% are planning capital expenditure in 2022-23. This has come largely on the back of enhanced capacity utilization due to improved demand, both domestic and external.
To conclude, on balance, it could be surmised that the Indian economy is poised to further consolidate its gains and head for growth of 8% or above next year.
The article first appeared in Mint on 28th December, 2021