Vegetable prices fell dramatically in November to bring inflation below 6%, but the rise in grain and legume prices continues to accelerate. | Photo credit: AFP
The story so far:
At this time last December, India’s economy was on the cusp of an incipient recovery from the COVID-19 pandemic, although the Omicron variant provided new speed bumps to the recovery. As of November 2021, with escalating oil prices, volatile commodity prices and shipping disruptions hitting supply chains, the US had recorded a 40-year high inflation rate and global ripple effects were expected to flare. The possibility of escalating tensions between Russia and Ukraine was also a concern. Broadly speaking, however, economists and the government hoped that Indian household consumer spending would return to pre-pandemic normality in 2022 and help spur a virtuous revival of private investment and boost job creation.
Why was 2022 a rougher storm than most expected?
While the Omicron wave was less deadly than previous waves of the pandemic, it also didn’t hit the economy as hard in 2022 as it had in the previous two years. However, some of the other New Year fear factors kicked in and eventually manifested themselves in more shocks around the world. Finance Minister Nirmala Sitharaman summed up the biggest setback when she explained to the Rajya Sabha on Wednesday why the government had asked for over 3.25 lakhcrore more than it had budgeted for this year. “As we prepared for the 2022-23 budget (which was presented on February 1st) there was a clear understanding around the world that the pandemic is easing and the recovery efforts of various countries are likely to put us all on a good path to recovery would lead. The IMF forecast that the Indian economy will grow at a high rate of 9%… But then came the war between Russia and Ukraine at the end of February and the complete disruption of supply chains, especially for food and energy,” she said. The additional funds, 8% above budget spending estimates, were requested primarily for food subsidies for the poor, introduced during the pandemic and recently extended through December 31, and an escalation of the fertilizer subsidy bill due to higher global prices.
Growth and inflation were expected to pick up in 2022, as JP Morgan chief executive and India’s chief economist Sajjid Chinoy told a CII economic policy summit last week, but by mid-year there were real concerns that the global economy could be slipping on supply shocks and in a recession would slip. “I dare say we end the year with one more R-word, which is resilience for the global economy. Just think about what’s happened in the last 12 months – we’ve had the strongest global inflation in 50 years around the world, we’ve had the most aggressive and synchronized monetary tightening cycle in 40 years, we’ve had the strongest US dollar in 20 years for much of this year. And we had what is less appreciated – the weakest Chinese growth in about 46 years, barring the pandemic. Now, in a normal year, two of those shocks would have been enough to send the global economy into recession, we’ve had four of those shocks and we’re still standing.” A key reason for that resilience that helped create an almost perfect storm surviving is that the balance sheets of large companies have strengthened on record profits in recent years and are better able to absorb these multiple shocks, Mr Chinoy said.
What caught the attention of Indian politicians?
While a slowdown in manufacturing and exports has been a concern in recent months, inflation has undoubtedly been India’s bugbear of the year. With Russia a major supplier of energy and Ukraine a dominant player in the world market for foods such as wheat and sunflower oil, fuel and food inflation has led to consumer price increases not seen in several countries in decades. India’s retail inflation, which rose to the central bank’s upper tolerance level of 6% in January 2022, has remained above that level for 10 of the 11 months for which data are now available. That included a few months of inflation above 7%, with April hitting a nearly eight-year high of 7.8%. Rising inflation forced central banks, including the US Federal Reserve, to accelerate the rollback of easy money policies used to prop up economic activity during the pandemic.
In a bid to contain inflationary pressures, the central bank of India also hiked interest rates throughout the year to bring the benchmark interest rate down to 6.25% by December from 4.9% in April. While the last hike announced earlier this month was a less aggressive 35 basis points compared to 50 basis points in previous policy iterations, there is still no sign that we have reached the end of this range. For its part, the central government has unveiled a series of price-cooling measures, including a ban on wheat exports and restrictions on some other food exports, with some measures to curb high raw material costs for the industry due to runaway commodity prices. Gasoline and diesel prices have been frozen for most of this year, but that also meant consumers didn’t benefit from price adjustments when global crude prices fell, as they have in recent weeks. Vegetable prices fell dramatically in November, taking inflation below 6% for the first time this year, but the rise in grain and legume prices continues to accelerate. The government expects moves to review grain and legume prices to be “more noticeable” in the coming months, while the Reserve Bank of India recently had to tell the center it has failed to meet its inflation target range for three straight quarters. expects inflation to average 5.9% in the January-March quarter. The director-general of the National Council for Applied Economic Research, Poonam Gupta, expects inflation to be lower next year, partly due to base effects and partly to interest rate hikes.
Are we already over the hill and what are the prospects for 2023?
Growth expectations varied throughout the year, as did growth rates, which were distorted by pandemic base effects (real GDP grew by 4.1% in the January-March quarter, followed by 13.5% in April-June, before leveling off between July and September halved to 6.3%). However, the Indian economy has proved broadly resilient in the face of strong external headwinds thanks to a steadily growing agricultural sector and catching up on pent-up demand for contact-intensive services, which have since recovered to pre-COVID levels. The World Bank recently upgraded its growth estimate for 2022-23 to 6.9%. However, growth is expected to be slower in the coming year (2023-24) at around 6% or slightly below.
Most developed nations are expected to enter recession, which will affect demand for Indian exports. With the Ukraine conflict far from over, fresh fears that a new strain of COVID-19 is spreading its wings, little hope of an immediate pause in global monetary tightening and the RBI’s warning of the next financial crisis to come from private With cryptocurrencies running out, the risks ahead remain as exhilarating as they were last year.
Maintaining macroeconomic stability and building buffers to navigate the economy through these external shocks, while pursuing reforms to make India a reliable alternative investment location, should have policymakers’ hands full. However, the immediate challenge for the government will be to balance these economic ebbs and flows with appropriate political messages in what may be the last full budget ahead of the Lok Sabha 2024 election, due to be presented in around five weeks.
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