A series of research agencies and financial institutions, both national and multilateral, have lowered their forecasts of the growth India’s economy is likely to achieve in the just-started fiscal year 2022-23. What is more serious is that we have not seen the end of this story.
As the year progresses and the negative factors that have recently come into play become more robust, further downward revisions may be ahead in the country. India’s central bank, RBI, lowered its projection from 7.8% to 7.2%. The World Bank, with a similar perception, lowered its targets from 8.7% to 8%.
Before going any further, it is important to note that despite these downward revisions, the growth outlook for the Indian economy remains among the highest among major economies. And if there is another downward revision, it is likely to be part of a similar overall move across the global economy that is likely to affect most other economies as well. Whether downgrade or not, the growth rate differential between India and the other major economies should remain in favor of India.
There are two main reasons why the outlook has turned gloomy. One is the war in Ukraine which has wreaked havoc on the global supply of raw materials. This sent commodity prices skyrocketing, with the bulk of the impact being on global energy prices. Russia is a key energy supplier for many European economies, especially the Germans. Although it seeks to reduce its trade with Russia, it remains dependent on Russian natural gas.
In India, the need for energy majors to pass on the impact of rising prices to global imports – and on energy, India remains heavily dependent on imports – has been accompanied by the need to make up for lost ground in the run-up to the final round of assembly elections, prices remained stable despite rising input costs. As a result, consumers are now very anxious about the way the prices of petrol, diesel and LPG, widely used by households, have been increased.
The overall impact resulting from the disruption of supply chains and rising international prices is that inflation based on the consumer price index hit a 17-month high of 6.95% in March. As a result, for the whole of the first quarter of calendar year 2022, retail price inflation exceeded the target of 4 (+/-2)% set by the monetary policy committee.
If this persists, the central bank will have no choice but to tighten liquidity, which will trigger a vicious circle. As banks and financial institutions tighten their purse strings in response to regulatory signals and lending rates rise (the SBI and several other major banks have just done so), companies will have to live with more working capital. expensive. This will force them to reduce their production, which will accentuate the general feeling of scarcity and thus contribute to further increasing prices.
The reduction in production at the level of small and medium enterprises will result in a reduction in the availability of jobs in the unorganized sector. The resulting drop in incomes, along with rising prices, will hit private consumption and hamper the recovery in demand and overall economic activity that had begun to unfold as the third wave of Covid-19 unfolded. was weakened and that life as a whole was trying to return to a normal rhythm.
This brings us back to the second reason why a cloud has appeared over the growth outlook for the current year. There are worrying signs that, to a lesser extent, Covid-19 appears to be entering a new phase of resurgence as a new mutation of the virus appears to be taking hold. At present, Delhi and neighboring Haryana seem to have been significantly affected and, according to the pattern already established, it is only a matter of time before the whole country is affected.
Europe, China and the United States are all in the grip of a resurgence of the virus even as with the decrease in infection from the last wave of Omicron, India and a sample of countries had started to remove all international travel restrictions.
The current outlook is that the new mutation of the virus, having started spreading across the country’s international borders, will also cross state borders and before we know it, the country will be in the throes of another wave of infection.
What can be done to minimize the damage that clearly seems to lie in wait? The first answer is — do not take the path followed earlier; that is, don’t go into a strict and severe lockdown (like China did in Shanghai) that will do more harm than good. The last thing the country can afford is a loss of jobs in the informal sector which will raise the specter of poverty for those least equipped to fight it.
The policy to follow is to let national life run as smoothly as possible and the government to continue its welfare measures, such as the distribution of free food, which it has already announced. But for it to work, there has to be a powerful non-economic agenda to go with it.
The first thing to do is to make it mandatory for everyone to wear a mask in public and to follow the three Cs: avoid crowds, enclosed spaces and close contact. Currently, the use of masks has almost disappeared in most parts of the country.
At the same time, it is imperative to intensify the vaccination campaign. All adults should not only complete the two-dose vaccination regimen, but also receive the booster dose. Currently, the government has allowed all adults to privately get the booster dose. It’s ill-advised. It is unthinkable that a poor person should be denied the extra protection that a booster dose will give them because they cannot afford it.
Faced with this threatening scenario, there is a clearly positive point. Even though the spread of the infection is picking up momentum, its impact does not appear to be severe. The level of hospitalization remains low, as does the number of deaths. This gives hope that the pandemic is on the way to becoming endemic, like the flu which is fought with an annual flu shot.