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Monday, January 17, 2022

India’s economic outlook in 2022

🔴 Sachchidanand Shukla writes: Headlines will be dominated by elections, inflation concerns, supply chain and labour shortages

Written by Sachchidanand Shukla |
Updated: January 8, 2022 9:07:51 am
A balloon vendor walks back home as the sun sets in Jammu. (AP Photo/Channi Anand)

The world is grappling with yet another variant of the virus. While India has made commendable progress on the vaccination front — its scope has now been expanded — Omicron, and its economic implications will dominate the discourse. So, what else is likely to dominate the headlines in 2022?

First, the return of inflation. Inflation has surged to record levels across major economies. While most central banks had expected a rise, it was expected to be “transitory”. However, this has not been the case, prompting several central banks to become cautious. The Federal Open Market Committee (FOMC) members have bought forward their rate hike expectations, and several other countries have already begun tightening. Given this, inflation would be the key variable to track in 2022. A faster-than-expected normalisation could lead to financial volatility, which in turn could affect growth prospects.

Second, market tantrums. Asset valuations are stretched and any adverse news on account of a faster-than-anticipated policy unwinding, or stalling recovery or even new mutants could lead to negative shocks and increased volatility in financial markets. Markets have seen some correction in December, and this could intensify or play out multiple times through 2022. There are multiple triggers that could push markets over the edge and manifest in the form of negative wealth effects and impact consumption.

Third, supply chain issues and labour shortages. One reason for the persistence of high inflation was supply disruptions. The supply response was much slower as compared to the rebound in demand post the reopening across major economies, putting upward pressure on prices. Besides, temporary disruptions (such as the closure of the Suez Canal and congestion in the ports of Los Angeles and Long Beach) also exacerbated delays in delivery times. Issues such as semi-conductor shortage also continue to persist with little respite in the near term. Besides, countries also experienced labour shortages, as labour force participation rates dropped with workers choosing not to return to the labour force. The evolution of these disruptions through 2022 will play an important role in determining the growth and inflation trajectory.

Fourth, global trade. Global trade witnessed a strong rebound in 2021, with the IMF estimating volumes to have grown by around 10 per cent. This played an important role in supporting recovery across economies — India’s merchandise exports surged by 41.9 per cent during January-November 2021. The surge was led by a favourable base, elevated commodity prices and loose fiscal/monetary policies that aided a sharp rebound in demand. These factors will be absent or will likely diminish in 2022, cooling off global trade growth. Given this, policymakers in India must focus on structural measures to reduce the cost of doing business and support MSMEs to boost the country’s exports.

Fifth, execution of existing announcements. The Indian government has announced several measures over the past two-three years such as the Production Linked Incentive (PLI) scheme, Gati Shakti for multi-modal connectivity, the National Monetisation Pipeline (NMP) to finance infrastructure creation, among others. These measures have the potential to crowd in private investments. Timely execution would be critical to provide a backstop to growth and spur the medium-term growth trajectory. Action on this front (including allocations in the Union budget 2022-23) would be critical to determine India’s growth outcomes in 2022-23 and beyond.

Sixth, private capex and housing. The investment scenario has been quite dire so far with new project announcements witnessing a sharp fall in 2020-21 and further in the first half of 2021-22. This is worrisome given that new project announcements in the current period would be critical to support investment demand in the medium term. However, there are some hopes in the form of a recovery led by the PLI schemes and a pick-up (albeit nascent) visible in the housing segment.

Seventh, the election calendar. As many as seven states are going for assembly elections in 2022. The outcome of these elections, particularly Uttar Pradesh, Punjab and Gujarat will be closely watched. Besides, the Presidential election is also slated to be held in 2022 and the results of these state assembly elections would play an important role.

This column first appeared in the print edition on January 8, 2022 under the title ‘What lies ahead’. The writer is Group Chief Economist, M&M. Views are personal

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