Synopsis–Let’s acknowledge that even with strong double-digit growth in FY22, India’s GDP as FY23 begins will be just about bigger than the FY20 GDP. That means even if everything goes right in FY22, we will merely get back to where we were before the pandemic.
Some of the best news on a slowing economy that got savagely hit by Covid has come in February-March. Starting with what was Nirmala Sitharaman’s best budget, and the latest being aflurry of FY22 GDP projections: from RBI’s 10.5% to Crisil’s 11% to IMF’s 11.5% to OECD’s 12.6% and Moody’s 13.7%.
Interestingly, GoI’s own implied FY22 GDP projection is slower than IMF’s, OECD’s and Moody’s. That’s because the budget’s numbers were based on 15.4% nominal growth. If inflation for next FY is reasonably assumed to be around 4.5%, GoI is expecting a sub-11% GDP growth. It’s good to see that Moody’s is more optimistic about India than GoI.
Grab That Jab
Let’s pause here. Because some of the most worrying recent news on Covid has also come in February-March. National-level daily new cases are now 20,000-plus, up from around 10,000. Maharashtra is again showing the biggest spike and reintroducing hyperlocal lockdowns.
Even other states, including Delhi, are registering upticks. The utterly socially-undistanced farm protests may be a reason for higher infection numbers in Punjab. So, wait with some apprehension about numbers from poll-bound states, especially large, crowded ones like West Bengal and Tamil Nadu.
Now’s the time to step up vaccination jabbing several millions every day, irrespective of how old they are and where they are. Remember, the economy needs the working-age population to move freely — that means cohorts between 18 and 65. And working parents need schools, colleges to stay open. That means teens, too, must get the shot.
If GoI opens up vaccination, let the market operate for those who can afford market prices and concentrate its efforts on those who can’t, the FM’s spending push and reforms will get the chance they deserve to work through a fully functioning economy. The V in India’s economy is not located in the debate about the shape of the recovery. The real V is vaccination speed. If we get that V right, the other V has a better chance.
Assuming real mass vaccination is rolled out soon, what else are the worry points for the economy as FY22 begins? First, while rural consumption should tick along nicely, there are worries about urban consumption demand, both from the working class and the white collar class. The big determinant here is the job market.
There’s plenty of good news on projected demand for jobs. But net impact on account of three factors is crucial. One, re-employment chances of those who lost jobs in 2020 — and are losing even now in 2021. Job losses have been staggering. If most of the unemployed stay that way over FY22, consumption will be affected.
Two, the services sector in large parts is still underperforming. And not only is the urban economy hugely impacted by services, poorer urban Indians receive no government support.
Note also that labour-intensive exports have had the slowest recovery among all export categories. These firms employ low-skilled and semi-skilled workers. Urban/industrial workingclass consumption is a real source of uncertainty.
Three, the level of discretionary demand for high-value items, especially autos and consumer durables. There’s big bounce back in demand in these categories. But as FY22 rolls on, much will depend on wages and salaries and confidence about near future returning to healthy levels.
The second worry is the banking system’s capacity to supply short-term credit and the larger financial system’s ability to finance long-duration projects.
Happy New Financial Year
GoI’s bad bank and the new development finance institution are key players here. Work on both seems to have begun. But, to use a cliché that’s really useful now, time is short. If neither entity is up and running soon, two things can scupper all happy projections.
One, the end of forbearance will mean a huge pile-up of bad loans for banks. Two, the big demand push that can come from well-financed longterm projects won’t come.
The third worry is yields on government securities (g-secs). A huge, although much-needed, GoI borrowing programme has already firmed up yields on g-secs. RBI’s governor has spoken about managing this, even mentioned that ‘stable’ functioning of this market is a public good.
But g-sec yields are in the uncertain territory. If there is upside pressure on yields as FY22 progresses, RBI’s progrowth monetary policy, which keeps interest rates low, will come under strain. Market interest rates benchmarked to g-secs can’t forever remain immune to rising yields.
The fourth worry is the old, old one —will the rain gods be kind? India has had two good monsoons. Three consecutive good monsoons are not unheard of. But they are not common either. Poor monsoon can upend a frighteningly large number of calculations, from rural demand to government spending to inflation. And they will have knock-on effects on the rest of the economy. The fifth worry is that if all four worries mentioned above don’t materialise, we will become complacent about India’s near-future.
Let’s acknowledge that even with strong double-digit growth in FY22, India’s GDP as FY23 begins will be just about bigger than the FY20 GDP. That means even if everything goes right in FY22, we will merely get back to where we were before the pandemic.
That’s the sobering thought policymakers must never forget as they preside over the world’s fastest-growing economy next financial year.