By October 2020, official data confirmed that the Indian economy had gone into a technical recession. But since then, the gross domestic product (GDP) has been clawing its way back. As such, at the start of 2021, it was hoped that India’s growth recovery would start to gather momentum. At that time, the concerns about Covid-19 had also taken a back seat. But a second Covid wave upset all calculations.
Still, by the end of the financial year 2021-22, India’s GDP is expected to come back to the pre-Covid level (see the chart below). Given the severity of the second Covid wave, that is a matter of relief.
The recovery has, however, altered the shape and fabric of the Indian economy. In technical jargon, this is because of a K-shaped recovery. In simple terms, it means that while some sectors/ sections of the economy have registered a very fast recovery, many are still struggling.
The entities that have done well are firms that were already in the formal sector and had the financial wherewithal to survive the repeated lockdowns and disruptions. In fact, many big firms in the formal economy have actually increased their market share during the Covid-19 pandemic and this has come at the cost of smaller, weaker firms that were mostly in the informal sector.
On the face of it, this might appear to be a minor detail. But in India’s case, this shift has massive ramifications. That’s because almost 90% of all employment in India happens in the informal sector. When the medium, small and micro enterprises (MSMEs) lose out to their counterparts in the formal economy, it results in the same GDP being produced with fewer people in jobs.
That is what explains the odd nature of the challenge facing the Indian economy in 2022. While the GDP is expected to recover back to pre-Covid levels — which in itself implies two full years wasted in terms of jobs that would have otherwise been created, incomes that would have been earned, and expenditures that would have been made — the same cannot be said about total employment in the country (see the chart above).
Not only was the total number of employed people as of August 2021 lower than the August 2019 level, the August 2019 level itself was lower than the August 2016 level — pointing to a stagnant employment situation over the past many years.
For one, this means that even an easing of the situation will require time, because we are talking about tens of millions of unemployed people. Two, it requires the government to actively act in a manner that tries to address the change of shift introduced by Covid.
Three, in the interim, such persistently high levels of unemployment can pose a challenge for social cohesion. As we witnessed in Haryana and Jharkhand, locals may demand laws to bar migrants from other states.
Private consumption slump
Private consumption expenditure is the biggest engine of GDP growth in India. It accounts for over 55% of all GDP. If this component remains weak, sustained recovery in GDP will not be possible. To a great extent, it is down because of job and income losses. But in part, it also has to do with people wanting to hold back for a rainy day. What if there is another equally severe third wave?
The year started with an Oxfam India report that detailed how Covid was widening existing inequalities and it ended with the World Inequality Report pegging India as one of the worst performers. “India stands out as a poor and very unequal country, with an affluent elite,” stated the WIR. While the top 10% and top 1% held respectively 57% and 22% of total national income, the bottom 50% share had gone down to 13%.
What makes this trend even more worrisome is that higher inequalities now also come with rising poverty levels. A study by Santosh Mehrotra and Jajati Parida has found that between 2012 and 2020, India witnessed an increase in the absolute number of poor — the first such reversal in poverty alleviation since Independence.
Persistently high inflation
Typically, there tends to be silver lining in phases when an economy is failing to create many jobs: The inflation rate stays low. But 2021 brought disappointment on that front as well. Between fast GDP growth in developed countries, higher crude oil prices and high domestic taxation, not to mention supply bottlenecks in different commodities, both retail and wholesale inflation stayed too high for comfort.
If 2020 was the year when Covid hit India and 2021 was the year when India’s economy recovered from that shock, then 2022 should be the year that will provide a snapshot of the economy as it is coming out of the Covid impact. It can then be compared with how the economy was in 2019 to figure out what has changed and what needs policy attention. Five factors that are likely to play a crucial role in how the economy shapes up in 2022:
OMICRON: The expectation that 2022 will be the first normal year after 2019 completely depends on the assumption that the Omicron variant, which is considered to be far more infectious than the deadly Delta, does not lead to any substantial loss of life and/or economic disruption. But if it does, or if there are other variants that emerge just like they did in April and May 2021, then all bets are off. If that happens, concerns about lives will yet again dominate those about livelihoods. A lot may depend again on the pace of vaccination — including the booster doses.
UNION BUDGET: Presuming no new Covid surges, the focus would shift to the Union Budget, which will be announced on February 1. In times of such upheaval, the Budget is more than just an accounting exercise. The government would be expected to lay out its plan to tackle high unemployment, high inflation, widening inequalities and rising poverty levels. But a lot depends on how the government sees the economic situation. Last year, for example, the government cut its Budget allocation for health by 10%. Former Chief Statistician of India Pronab Sen said, ”The government doesn’t seem to be recognising that (K-shaped recovery) at all in its pronouncements.” Sen said the government has been misdiagnosing the economy for the past five years, especially since demonetisation. “That is what has resulted in formal sector firms increasing the market share at the cost of MSMEs.” This, in turn, gets reflected in both higher tax collections and lower employment levels, he said.
ELECTIONS: The repeal of the three contentious farm laws was another example of how policymaking can be impacted by electoral pressures. In that regard, 2022 is a critical year. Not only does it have seven state Assembly elections, there is also the fact that the BJP is in power in six of them. Consider two polar opposites — one where BJP wins all seven and another where it loses in all — to understand how these elections may impact the central government’s policy choices, especially with general elections due in early 2024.
Newsletter | Click to get the day’s best explainers in your inbox
NPAs: Before Covid disrupted India’s economy, high levels of non-performing assets (NPAs) were one of the biggest stumbling blocks. During Covid, mandatory asset quality reviews have been suspended. But when they are re-started in 2022, Sen said, it is anybody’s guess how high they may jump.
EXTERNAL FACTORS: Several key central banks, especially the US Fed, have started tightening their monetary policy in light of the high inflation in the developed countries. This, in turn, will force India’s RBI to raise interest rates as well. “To a great extent monetary tightening has already happened in India. It is just that no one is talking about it. Look at the 10-year government bond yields. They have gone from 5.7% to 6.4% (since May 2020),” he points out. For Indians, the silver lining is that as monetary tightening happens in the West, crude oil prices may simmer down.