The global economy is hamstrung with rising inflation and slowing growth. Inflation is now well-entrenched across the world, and is definitely not transitory in nature, as thought by US Fed Chair Mr. Jerome Powell and several economists, few months ago. The US consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. Similarly, inflation in the UK touched a 40-year high of 9% in April, and is expected to touch 9.1% in May. Further six member states of the EU have inflation rates above 10%, and the average is 8.1%. Most developing countries have been suffering from the wrath of inflation and slowdown in economic growth. Inflation in developed as well as developing economies has been sparked by low interest rates and government stimulus to counter the Covid-19 pandemic’s impact, and disruption in global supply chains, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis.
India has been witnessing rise in retail inflation above the Reserve Bank of India’s (RBI) mandated tolerance level of 6%, from January 2022. Wholesale inflation, however, started rising alarmingly from March 2021, onwards. The RBI and Government of India (GoI) have initiated monetary and fiscal measures, respectively, to curb inflation.
Easing of India’s Retail Inflation
India’s retail [Consumer Price Index (CPI)] inflation eased in May 2022 to 7.04% from an almost eight years high of 7.79% in April (Figure 1). However, it remained above RBI’s upper tolerance level of 6% for the fifth month in a row. There was a broad-based deceleration in inflation, mainly on account of slower increases in food prices. Core inflation, too, moderated in May to 6.09% from 6.96% in the previous month.
The slowing down of inflation was mainly on account of deceleration in rural CPI inflation, which declined significantly from 8.38% in April 2022 to 7.01% in May (Figure 1), as a result of a decline in the combined weighted contribution of health, education and personal care and effects by 35 basis points (bps), and 40 bps decline in the weighted contribution of food and beverages. Urban inflation, however, declined marginally from 7.09% in April to 7.08% in May (Figure 1). Favourable base effect, too contributed to the decline in inflation. However, there are more upside risks to inflation, with international crude oil prices remaining stubbornly high.
The consumer food price inflation (CFPI) is the major determinant of retail inflation in India, with a weightage of 39.1% in the CPI. During the six-month period December 2021 to May 2022, CFPI more than doubled from 4.05% in December to 8.31% in April, before dropping to 7.97% in May (Figure 2). This was due to elevated oils and fats inflation at 24.3% in December to 13.3% in May (Figure 3) and a sharp increase in vegetable inflation from -3% in December to 18.3% in May (Figure 5). India imports nearly 60% of its crude edible oil requirement. Around 90% of India’s annual crude sunflower oil requirement of 22-23 lakh tonne is imported from Ukraine to the tune of 70% and 20% from Russia and the remaining 10% from Argentina. The Ukraine-Russia conflict has disrupted supplies of sunflower oil and sharply pushed up its price in the international market, impacting India’s import cost.
The principal reason for a sharp rise in vegetable prices is the increase in transportation cost due to high fuel price, which in turn is the result of elevated international price of crude oil. High tomato prices, due to fall in production on account of heatwaves prevailing in different parts of the country, also impacted vegetable inflation.
While cereal inflation increased steadily from 2.6 % in December 2021 to 5,3% in May 2022, pulses inflation declined from 2.4% to -0.4% during the same period (Figure 3). Decline in pulses inflation was on account of record estimated production of pulses in the Kharif and Rabi seasons in the year 2021-22, as well as higher imports of Arhar and Urad.
Inflation in eggs declined sharply from 4.2% in February to -4.6% in May (Figure 4). Meat and fish inflation rose to 8.2% in May from 7% in the previous month, before falling from 9.6% in March, while milk inflation increased steadily from 3.8% in December 2021 to 5.6% in May 2022 (Figure 4).
Fruit inflation declined sharply from 5% in April to 2.3% in May, while sugar inflation fell from 5.2% to 4.3% (Figure 5).
Fuel and light inflation remained elevated during the period at 11% in December 2021, 10.8% in April 2022 and 9.5% in May 2022 (Figure 6), on account of high international crude oil prices, with Brent crude prices remaining around $120 per barrel.
Surging Wholesale Inflation
India’s wholesale price index (WPI) inflation increased from 15.1 in April to 15.9% in May, the highest level since August 1991, driven by soaring inflation of primary articles (15.5% to 19.7%) and fuel and power inflation (38.7% to 40.6%) (Figure 7). The wholesale inflation of manufactured products, however, eased from 10.9% to 10.1% (Figure 7).
Figure 8 shows that, the gap between wholesale and retail inflation narrowed down from 8.61% in December 2021 to 7.29% in April 2022, before rising to 8.84% in May. This was when retail inflation eased from 7.8% to 7% and wholesale inflation surged from 15.1% to 15.9%.
WPI inflation in the country has been increasing much faster than CPI inflation, since March 2021. Consequently, it is expected that retail inflation would slowly move closer towards wholesale inflation, in the months to come. Dr. Pronab Sen, former Chief Statistician of India has put it succinctly: “Rising WPI will, by and large, translate into higher retail prices.” High wholesale inflation indicates that input price pressures are still quite high, which will eventually reflect on retail prices.
Addressing Inflationary Woes
The RBI raised the policy repo rate by 40 bps in May 2022 and 50 bps in June 2022. The central bank is no longer behind the curve and the transmission of the rate in the banking system is also expected to be reasonably quick. While increasing the repo rate could hurt India’s economic recovery, the inability to control inflation will hurt the country’s growth prospects in the medium to long term.
RBI’s inflation projection for FY23 is 6.7%. It is expected that RBI’s Monetary Policy Committee (MPC) could raise the policy repo rate by 60-85 bps by December 2023, i.e., to 5.5-5.75%, depending on the inflation trajectory. A further cause for concern is the depreciation of the rupee, which could worsen inflation. RBI Governor Mr. Shaktikanta Das, in his June 08, 2022 statement on the Monetary Policy has expressed RBI’s approach to control inflation as: “Our approach underscores a commitment to move towards normal monetary conditions in a calibrated manner. We will remain focused on bringing down inflation closer to the target and fostering macroeconomic stability.”
The full impact of the measures announced by the government, viz, excise duty cuts on petrol and diesel, could be seen in the June inflation figure, as the cut in excise duty was announced in the last week of May. With the end of Russia-Ukraine conflict nowhere in sight, inflationary situation could worsen across the world. Although there has been a steady rise in revenue collection so far in FY23, GoI may have to tread the tightrope of balancing excise duty cut for controlling fuel inflation with incurring the budgeted capital expenditure for economic growth.
The RBI’s June 2022 Monetary Policy has justifiably been in the news for the hike in the Repo rate by 50 bps to 4.90 per cent, the withdrawal of the accommodative stance, the raising of the RBI’s inflation projections for FY 23 by 100 bps to 6.7 per cent, the evolving growth-inflation dynamics and the risks of un-anchoring of inflation and inflationary expectations to macro-economic stability. While all these are valid concerns, the issue of the renewed thrust on digitization has not quite received the attention it rightly deserves. The limited purpose of this brief piece is to highlight the impetus provided in this Policy to the inexorable forces of digitization, which are now sweeping the banking and financial world.
Considered in a proper historical and comparative perspective, digitization and disruption have altered the rules of the game and brought about a new normal in this VUCA (volatility, uncertainty, complexity and ambiguity) world.
The issues of disruptive innovations and domain knowledge together with big-picture issues facing industries and organizations have become commonplace. These competitive realities have blurred industry boundaries, transformed standard practice and rendered conventional blueprint of development obsolete making it necessary to leverage the power of the digital by extrapolating the unknown.
In this evolving socio-economic order, there have been game changing changes in data analytics, digitalization and disruption because of the confluence of innovation, big data, artificial intelligence (AI), machine learning (ML), deep learning (DL), robotics, analytics, internet and entrepreneurship.
Progressive digitalization is reflected in Direct Benefit Transfers (DBTs), the JAM Trinity (Jan Dhan, Aadhaar, Mobile- RuPay Cards) and Unified Payment Interface, Digital India initiative and literacy programmes.
India is surging to a digital-first economy to meet the “revolution of rising expectations”. This implacable process has significantly influenced employee empowerment, customer engagement, operational efficiency and business models. All four dimensions of technology- revenue, expense, experience and accuracy or compliance- impacting a company-have improved remarkably. Aadhar has become a unifying platform with performance transcending ‘reach’ and ‘legacy’.
Digitization has transformed the entire financial sector because of reduced costs and unimaginably higher scale. Factors driving banking digitisation include digitally evolved consumers; smartphone penetration and low cost internet connectivity; cheaper products / services using M-banking and Wallet; government and RBI initiatives like Digital India, UPI, Bharat QR, Aadhaar, Point of Sale (PoS) and equipped market players.
The adoption and adaptation of new technology and digital payments have transformed conventional banking and significantly enhanced banking outreach. Progressively rising digitization has transformed lending processes, viz., credit assessment and loan approval, disbursement, repayment and customer services. But there is certainly a long road to traverse, as, for example, reflected in the fact that at end-March 2020, banks lent ₹ 1.1 lakh crore digitally vis-à-vis ₹ 53.1 lakh crore physically; NBFCs had ₹ 23, 000 crore digital loans as against ₹ 1.9 lakh crore loan physically. Enhanced mandates on recurring payments via credit and debit cards from ₹ 5,000 to ₹ 15,000 per transaction will drive digitization.
Electronic payments lead to convenience, discounts, tracking spends, lower risk and enhance gains. Linking of RuPay credit cards to UPI network could expand the credit market from the present level of 50 million to about 250 million users (at present UPI has 250 million users and 50 million merchants on-boarded), i.e., a massive five-fold rise.
With this game-changing development, the UPI’s coverage would transcend debit cards and bank accounts to credit cards. While pricing remains an issue, permitting UPI-based payments to credit cards could divert some expenditure from CASA accounts to credit cards. This would drive boost card utilisation level and enhance spends per card for banks with a higher share of RuPay cards.
UPI-based payment more than doubled to ₹ 84.16 lakh crore in 2021-22 from ₹ 41.04 lakh crore in FY21. The overall credit outstanding against credit cards stood at nearly ₹1.5 lakh crore as on April 22, 2022. With this strategic measure, both convenience and short-term liquidity will be greatly facilitated. As Victor Hugo (1802-1885) said in a different context, this is “an idea, whose time has come”.
Real time data on turnover, customer profile, lifestyle, spend, customers customer’s instantaneous data can transform Indian fintech’s rapidly expanding space. This is doable with convergence of data, technology and money to transform lives of borrowers, investors and businesses. But cyber security emerges as a key concern, particularly with data moving data offline to the cloud.
Revamped digital ecosystem and the winds of change sweeping India provide an enabling environment to revolutionise India’s socio-economic landscape, similar in its range and sweep perhaps only to the mobile or the internet revolution. This onward march would thus positively influence both growth and distributive equity.
The U.S. consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. There has been no respite from the upward movement of retail inflation in the US since February 2021, which had a benign reading of 1.7% to 5% in April 2021, followed by a steady 5.3-5.4% during July-September, when the Federal Reserve Chair Mr. Jerome Powell was convinced that inflation was transitory in nature. However, October (6.2%) onwards inflation continued to rise unabated touching a 40-year high in March 2022, followed by a slight drop to 8.3% in April, before rising to 8.6% in May 2022 (see figure below). The core-price index increased 6% in May, down from 6.2% in April. March’s 6.5% rise was the highest rate since August 1982.
High inflationary trend is a downside of strong growth in the US, sparked by low interest rates and government stimulus to counter the Covid19 pandemic’s impact, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis. Further, price pressures are strong across much of the US economy partly due to an unusually tight U.S. labor market, with demand for workers outstripping supply.
The rise in May inflation was driven partly due to sharp rises in the prices for energy (34.6%) from a year earlier, and groceries (11.9%). The surge in inflation belied hopes among some analysts about the nearing of peak inflation, primarily due to further rise in energy prices, as a result of the prolonged Russia-Ukraine conflict, and a steady rise in services-related costs, mainly those linked to the travel industry.
The US Federal Reserve seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Accordingly, the Federal Open Market Committee (FOMC) had decided to raise the target range for the federal funds rate to 3/4 to 1% at its May 04, 2022 meeting, while anticipating that ongoing increases in the target range will be appropriate. With the May inflation print at more than 40-year high, Ms. Lael Brainard, the vice-chair of the Federal Reserve, has warned that the US central bank may need to extend its run of half-point rate rises into September if inflation does not slow sufficiently in the coming months.
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 8th June 2022, unanimously decided to raise the policy repo rate by 50 basis points (bps), the steepest increase in more than nine years, to 4.9 per cent. This is the second hike in the repo rate in just over a month, adding up 90 bps from 4 per cent set in May 2020, with a view to controlling inflation, aggressively. While the RBI was behind the curve to control inflation till the April MPC meeting, it took a decisive step to control spiraling inflation by raising the first repo rate hike in two years by 40 bps in the off-cycle MPC meeting on 4th May 2022.
The MPC has increased the inflation forecast by 100 bps to 6.7 per cent for fiscal year (FY) 2022-23, and has projected an inflation rate of 7.5 per cent, 7.4 per cent, and 6.2 per cent for Q1, Q2 and Q3 of FY23, respectively. For the first time since the flexible inflation-targeting framework was introduced in October 2016, for policy repo rate setting by the MPC, the RBI, in all likelihood, will fail to achieve its mandate – which is to keep the average inflation at 4 per cent with a +/- 2 per cent tolerance limit – for three consecutive quarters. As per the mandate, RBI would need to explain to Government of India the reasons for inflation exceeding the upper tolerance limit of 6 per cent for three consecutive quarters.
Inflation is now a global phenomenon, due to the Ukraine-Russia war, Covid-related lockdowns in China and global supply chain disruptions. As stated by RBI Governor Mr. Shaktikanta Das, “The war has led to globalisation of inflation. Not surprisingly, central banks are reorienting and recalibrating their monetary policies. Emerging market economies (EMEs) are facing bigger challenges from increased market turbulence, monetary policy shifts in advanced economies (AEs) and their spillovers. The process of economic recovery in EMEs is also getting affected”.
The MPC also decided to drop the accommodative stance to “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. As RBI has embarked on an aggressive policy tightening cycle, the MPC is expected to resort to calibrated tightening and could decide on two more hikes of 25 bps each in FY23, taking the repo rate to 5.65 per cent by March 2023.
However, there could arise a risk of a wide divergence from RBI’s inflation projections, which could result in a sharper rate hike. Research by SBI shows that RBI could factor in a rate hike in August and even October MPC meetings, and take the repo rate higher than pre-pandemic level by August to 5.25 per cent and in October to 5.5 per cent. The peak rate at the end of the cycle, according to the SBI report now has a lower bound of 5.5 per cent and could go up to 5.75 per cent, depending on inflation trajectory.
Banks have raised their lending rates in response to the rise in the repo rate. This will cause borrowers to pay higher equated monthly instalments for their loans. Further, the demand for loans by retail as well as corporate borrowers would fall, restricting economic activities.
The RBI, however, has kept its growth forecast unchanged at 7.2 per cent for FY23, with Q1, Q2 and Q3 growth at 16.2 per cent, 6.2 per cent, 4.1 per cent; and 4.0 per cent, respectively, with risks broadly balanced. According to the MPC statement, the recovery in domestic economic activity is gathering strength due to the following factors:
Rural consumption should benefit from the likely normal south-west monsoon and the expected improvement in agricultural prospects;
A rebound in contact-intensive services is likely to bolster urban consumption, going forward;
Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit;
Growth of merchandise and services exports is set to sustain the recent buoyancy.
However, the MPC has warned that spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the growth outlook.
In the face of an unabated rise in inflation, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in an off-cycle meeting held on 2nd and 4th May 2022, decided to raise the policy repo rate by 40 basis points (bps) to 4.4 per cent, and the cash reserve ratio (CRR) by 50 bps to 4.5 per cent. This is the first hike in repo rate after almost two years.
The timing of the hike came as a surprise to the financial markets, with the Sensex crashing by 1,307 points, or 2.29 per cent lower than the previous day’s close (3rd May 2022). However, it was expected by economists that the MPC would start raising the policy repo rate anytime soon during FY23, as CPI inflation remained above RBI’s tolerance level of 6 per cent during the three months January-March 2022. Inflation in March 2022 was much above the tolerance limit at 6.95 per cent. The inflation outlook remained grim in the context of rising food prices, apart from the rise in global prices of crude oil, wheat and sunflower oil due to global supply disruptions on account of the Russia-Ukraine conflict.
Further, the decision by Indonesia to ban exports of palm oil, due to fall in domestic production on account of labour shortage in the country, has resulted in a sharp rise in price of edible oils in India, which depends on imports from Indonesia for 60 per cent of its demand for palm oil.
The MPC in its previous meeting during 06-08 April 2022 had decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. In its off-cycle meeting, the MPC using an almost similar language, continued to maintain an accommodative stance, while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
The MPC has stated that inflation would “rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects”. Given RBI’s projection of 5.7 per cent inflation during FY23, which could well be revised upwards, it can be expected that the RBI would increase the policy repo rate going forward by 75 bps to touch the pre-pandemic level of 5.15 per cent by end March 2023. Further, the CRR hike by 50 bps will result in an upward pressure on interest rates while withdrawing system liquidity by an additional INR 87,000 crore.
While loans to retail and micro, small and medium enterprises (MSME) borrowers, linked to the policy repo rate will become costlier with immediate effect, interest rates on corporate loans will rise within a month or so. Following the decision of the RBI to raise the policy repo rate, Bank of Baroda and ICICI Bank raised their external benchmark-linked lending rates by 40 bps each.
While costlier loans to productive sectors would have an adverse impact on India’s growth prospects, the country can still maintain its position as the fastest growing large economy in the world, with the government having prioritized investment in infrastructure, while also carrying forward its agenda of structural reforms, in addition to a focus on export-oriented manufacturing through the production linked incentive (PLI) scheme, and investment in education and health.
The International Monetary Fund (IMF) in its April 2022 edition of the World Economic Outlook (WEO) has projected the global economy to slow down sharply from 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. The projections are 0.8 and 0.2 percentage points lower for 2022 and 2023, respectively, made in the January 2022 WEO Update.
Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. The sharp cut in growth projections is the result of the humanitarian and economic impact of Russia-Ukraine war, and the sanctions against Russia imposed by the United States (US) and its allies. Crucially, the projections by IMF assume that the conflict remains confined to Ukraine, further sanctions on Russia exempt the energy sector and the pandemic’s health and economic impacts weaken during 2022. Further, employment and output will remain below pre-pandemic trends through 2026, with few exceptions.
The IMF warns that unusually high uncertainty surrounds the growth forecast, and downside risks to the global outlook dominate—including from a possible worsening of the war, escalation of sanctions on Russia, a sharper-than-anticipated deceleration in China from 8.1 per cent in 2021 to 4.4 per cent in 2022. Moreover, the war in Ukraine has increased the probability of wider social tensions because of higher food and energy prices, which would further weigh on the outlook.
The advanced economies (AEs) are expected to slow-down sharply from 5.2 per cent in 2021 to 3.3 per cent in 2022 and 2.4 per cent in 2023, as shown in the chart below. The US is expected to witness a sharp fall in growth from 5.7 per cent in 2021 to 3.7 in 2022 and 2.3 per cent in 2023. The Euro area, too, is estimated to slowdown from 5.3 per cent in 2021 to 2.8 per cent and 2.3 per cent in 2022 and 2023, respectively.
The growth of emerging market and developing economies (EMDEs) is expected to fall sharply from 6.8 per cent in 2021 to 3.8 per cent in 2022, but would rise to 4.4 per cent in 2023. The projected growth rates for AEs as well as EMDEs have been downgraded from the projections made by the IMF in October 2021 and January 2022, in view of the ongoing Russia-Ukraine war, disruption in global supply chains and unprecedented world-wide inflationary situation.
The IMF downgraded India’s growth forecast for FY23 from 9 per cent estimated in January 2022 to 8.2 per cent, citing the impact of high oil prices on consumer demand and private investments. The forecast for India by the IMF is among the most optimistic so far. While the RBI lowered India’s growth projection for FY23 from 7.8 per cent estimated earlier to 7.2 per cent in the latest Monetary Policy Committee (MPC) meeting (06-08 April 2022), the World Bank reduced India’s growth forecast from 8.7 per cent estimated in January 2022 to 8 per cent, recently. However, India is projected to remain the world’s fastest-growing major economy by the IMF, the World Bank and the OECD. But we live in an uncertain world, and the actual growth could end up below the projections.
The IMF has identified the following five principal forces that would shape the near-term global outlook:
The war in Ukraine
The economic damage will lead to a significant slowdown in global growth in 2022 – a severe double-digit drop in GDP for Ukraine and an 8.5 per cent contraction in Russia, along with spillovers across the world through commodity markets, trade, and financial channels.
Monetary tightening and financial market volatility
Significant rise in inflation in major economies has led to tightening of monetary policy by central banks. This has contributed to a rapid increase in nominal interest rates across advanced economy sovereign borrowers. In the months ahead, policy rates are generally expected to rise further and central banks would begin to unwind balance sheets in AEs and also in several EMDEs. Capital outflows from EMDEs have led to sharp fluctuations in the financial markets in these economies. Further, the financial markets across the globe have been experiencing sharp fluctuations due to the imminent rise in US Fed rates.
Policy space in many countries has been eroded by necessary higher COVID-related spending and lower tax revenue in 2020–21. Faced with rising borrowing costs, governments are increasingly challenged by the imperative to rebuild buffers.
Deceleration in China’s economic growth has wider ramifications for Asia and for commodity exporters.
Pandemic and vaccine access
Restrictions have begun to ease as the peak of the Omicron wave passes and global weekly COVID deaths decline. The risk of infection leading to severe illness or death appears lower for the dominant Omicron strain than for others—especially for the vaccinated and boosted. The health and economic impacts of the virus are expected to start to fade in the second quarter of 2022.
India’s Wholesale Price Index (WPI) inflation surged to a 4-month high of 14.55 per cent in March 2022, which was a sharp rise from 13.11 per cent in the previous month. This was the result of an unfavourable base effect (1.3 per cent in March 2021) and broad-based rally in global commodity prices, especially crude oil, due to the Russia-Ukraine conflict. With this, WPI remained in double digits throughout FY22. The average inflation at 12.94 per cent in FY22 is the highest in three decades.
While wholesale food inflation rate eased sequentially from 8.19 per cent to 8.06 per cent in March 2022, vegetable inflation dropped sharply from 26.93 per cent in the previous month, but remained elevated at 19.88 per cent. Among non-food items, crude oil inflation increased by a whopping 83.56 per cent, leading to a fuel inflation of 34.52 per cent during March 2022. Manufactured price inflation rate rose to 10.71 per cent during the month, from 9.84 per cent in the previous month, as edible oil and basic metals inflation rose to 16.06 per cent and 25.97 per cent, respectively. Core inflation, which excludes volatile food and fuel items, increased from 10 per cent in February 2022 to 10.9 per cent in March 2022.
Although WPI is not the primary index which guides the Reserve Bank of India’s (RBI) monetary policy decisions, it cannot be ignored by the central bank, as rising input costs can feed CPI inflation. This is likely to happen with businesses passing on the rising input costs to retail prices. The gap between WPI and CPI has narrowed from 9.96 percentage points in November 2021 to 7.60 percentage points in March 2022. CPI inflation is on a rising trend since November 2021 and has shot up to a 17-month high of 6.95 per cent in March 2022. What is worrisome is that retail inflation has remained above RBI’s tolerance level of 6 per cent for the third consecutive month.
RBI’s latest industrial outlook survey indicates that manufacturing sector firms expect higher input and output price pressures going forward. Further, on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 100 per barrel, RBI, in its latest monetary policy (8 April 2022) has projected 5.7 per cent inflation in 2022-23. While the Monetary Policy Committee (MPC) has unanimously decided to maintain the accommodative policy stance, it will focus on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Globally inflation is on the rise, and will continue to remain elevated even after the Russia-Ukraine conflict comes to an end. The uncertainty surrounding the conflict makes it difficult to estimate inflation during the next one-year period. This is true for most countries, including India. Going forward, RBI could raise the policy repo rate by 50 basis points (bps) during FY23.
The prospects for India’s real GDP growth for 2021-22 received a setback with the latest official projection (second advance estimate of NSO, MoSPI, GoI on 28 February 2022) dropping to 8.9 per cent (Figure 1) from 9.2 per cent (first advance estimate on 07 January 2022). However, the quantum of real GDP, has been estimated to increase from INR147.54 trillion (USD 1.95 trillion) (FAE) to INR 147.72 trillion (USD 1.95 trillion) (SAE). The growth of nominal GDP was revised upward from 17.6 per cent to 19.4 per cent, with the quantum of nominal GDP witnessing an uptick from INR 232.15 trillion (USD 3.06 trillion) to INR 236.44 trillion (USD 3.12 trillion) (SAE). The real GDP growth estimate for the previous fiscal year showed an improvement to -6.6 per cent (first revised estimate) from -7.3 per cent (provisional estimate).
India’s third quarter (Q3) real GDP fell sharply to 5.4 per cent from 8.5 per cent (Q2) and 20.3 per cent (Q1) (Figure 2).
Projections of India’s real GDP growth for FY 22 and FY23 are presented in the following table. The lowest estimate for FY 22 is 8.7 per cent by the World Bank and the highest is 9.4 per cent by OECD. The highest projection for FY 23 at 8-8.5 percent has been estimated in the Economic Survey 2021-22 (MoF, GoI) and the lowest is by the World Bank at 6.8 per cent.
India’s real GVA is estimated to grow at 8.3 per cent (SAE) in FY22, downgraded from 8.6 per cent (FAE) (Figure 3). The sectors which witnessed high growth are mining and quarrying (12.6 per cent from a low base of -8.6 per cent in FY21), public administration (12.5 per cent from -5.5 per cent), manufacturing (10.5 per cent from -0.6 per cent), and trade, hotels, transport, etc. (11.6 per cent from -20.2 per cent). While the agriculture sector is estimated to grow at a constant rate of 3.3 per cent as in the previous year, financial, real estate and professional sector is estimated to grow at 4.3 per cent (from 2.2 per cent in FY 21) (Figure 3).
India’s growth has traditionally been consumption-led, and the share of private final consumption expenditure (PFCE) in GDP is estimated to decline to 56.6 per cent in FY22 (SAE) from 57.3 per cent in FY21 (Figure 4). The pandemic-induced loss of income and livelihood opportunities in the contact intensive service sector, the informal sector and rural areas, are expected to dampen India’s growth prospects for FY22. However, GoI’s thrust on investment in infrastructure, could lead to high and sustainable growth in income, employment and economic growth. While the estimated increase in the share of gross fixed capital formation (GFCF) from 30.5 per cent in FY21 to 32 per cent in FY22, is a stimulant for growth, the share of government final consumption expenditure (GFCE) which is estimated to decline from 11.3 per cent to 10.9 per cent, could drag down growth. However, the FY 23 Union Budget’s focus on investment in infrastructure with a significantly higher allocation over that of the previous Budget, would crowd in private investment and enable India to grow at around 8 per cent, while continuing to be the fastest growing large economy in the world.
The economic impact of the third wave of the pandemic has not been as severe as that of the previous waves. The impact of global headwinds like the Russia-Ukraine conflict and the consequent sharp rise in the prices of crude oil and commodity prices, have not been factored in these estimates, and therefore, the final growth print could be 1-2 per cent lower. About 85 per cent of India’s demand for crude oil is met from imports and with the recent sharp rise in Brent crude price to USD 130/ barrel, there would be a sharp rise in the country’s import bill, worsening the country’s current account deficit. This would also lead to a sharper rise in retail inflation, which has already crossed RBI’s upper tolerance limit of 6 per cent. The RBI has continued with its accommodative stance with a view to revving up economic growth. However, with worsening inflationary expectations, the RBI could switch to a neutral stance, and could consider raising the repo rate by 25 bps in the next MPC meeting in April 2022 or in the June 2022 meeting. The developed economies are suffering from the worst phase of inflation in the last 3-4 decades, and the Central Banks in these countries have started tightening liquidity. The US Federal Reserve is expected to raise the Fed rate from the present near zero rate by 25 basis points, in March 2022, and at least two-three more rate hikes during the year.
The Russia-Ukraine conflict has also eroded financial markets globally, including India. Russian strikes at Europe’s largest nuclear plant in Ukraine wiped INR 5 trillion (USD 66 billion) off investor wealth in India on 04 March 2022, with the geopolitical tension eroding about INR 15 trillion ($197 billion) in fortune from 15 February 2022, when Russia announced a partial withdrawal of its troops from Ukrainian border only to launch a full-scale invasion later on.
Geopolitics could erode India’s growth prospects, depending on how long the Russia-Ukraine conflict and the consequent sanctions against Russia would continue. However, if the conflict ends within the next few months, and India gives a big push to investment in infrastructure, the country’s growth prospects could improve, and a 7.8 – 8 per cent growth in FY23 could be achievable.
The Union Budget 2022-23 is refreshingly growth oriented, futuristic and at the same time it aims to promote all-inclusive welfare. India’s economic growth which was already on a decelerating mode from 7.2% in 2017-18 to 6.1% in 2018-19 and further down to 4% in 2019-20, due to structural issues, and loss of momentum in economic reforms, fell sharply to -7.3% in 2020-21, as a result of the pandemic (Figure 1). However, the year 2021-22 is poised to reverse the trend to touch 9.2%, and India is set to regain its status as the fastest growing large economy.
There are, however, looming headwinds like retail inflation breaching RBI’s upper tolerance limit of 6% (6.01% in January 2022) on account of rising food prices, international crude oil prices, with the Brent crude oil price hovering around $96 per barrel, and inching towards $100 per barrel, due to strong demand and supply disruptions as a result of the Ukraine crisis. The imminent speeding up of hikes in the Fed rate, and the consequent flight of capital from emerging market economies like India, could depreciate the Indian rupee further and could worsen the inflationary situation. Further, loss of lives and livelihoods, and consequently slow growth in consumption demand, along with weak growth in contact intensive sectors due to the pandemic, could prove to be a drag on the economy, if they persist for some more time.
Investment in Infrastructure for Turbo-charging the Indian Economy
The Budget has done well to focus on the achievement of high, sustainable and inclusive growth. It has proposed a significantly higher allocation of 35.4% to capital expenditure to INR 7.5 trillion compared to INR 5.54 trillion in the previous year’s Budget, which is a continuance of strong growth in capital expenditure during 2020-21(actual) and 2021-22 (budget estimate) (Figure 2).
The basic philosophy behind the Budget is to spend more in the core sector and accelerate growth. A massive release of funds for infrastructure projects will stimulate a large number of core sector suppliers such as steel and cement, which will create more jobs and increase economic demand and boosting growth in the economy. Investments in infrastructure is said to have a multiplier effect of four times of the money spent. As asserted by the Union Finance Minister Ms. Nirmala Sitharaman: “ Even if private investment is taking a while to come into this whole scene, the government will have to spend and pull the economy forward and gradually as we do this, we expect the private investment to come out in full force.”
The present Budget has carried forward the focus on investment in infrastructure for boosting economic growth, along with a focus on health and wellbeing of the people in the Union Budget 2021-22. The pillars on which the previous Budget rested were: health and wellbeing; physical and financial capital and infrastructure; inclusive development for an aspirational India; reinvigorating human capital; innovation and R&D; and minimum government and maximum governance. The Budget 2022-23 carries forward the pillars of the previous Budget, but adopts certain goals for the next quarter century – the Amrit Kaal – setting a blueprint for the vision of India@100, viz. complementing the macro-economic level growth focus with a micro-economic level all-inclusive welfare focus; promoting digital economy & fintech, technology enabled development, energy transition, and climate action; and relying on virtuous cycle starting from private investment with public capital investment helping to crowd-in private investment.
The four priorities for achieving the vision for India@100 articulated in the Budget are: PM Gati Shakti; Inclusive Development; Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action; and Financing of Investments. PM Gati Shakti is driven by seven engines, viz. roads, railways, airports, ports, mass Transport, waterways, and logistics infrastructure. The aim is to bring about seamless multimodal movement of goods and people, which would lead to overall improvement of efficiency in the economy and ease of living. The PM Gati Shakti National Master Plan aims to bring about world class modern infrastructure and logistics synergy. This would lead to improvement in productivity and acceleration in economic growth and development on a sustainable basis.
Ecologically sustainable connectivity in hilly areas, through National Ropeways Development Programme, proposed to be taken up on PPP mode, would not only provide a convenient mode of transport, but would also promote tourism. The programme will also cover congested urban areas.
The Prime Minister’s Development Initiative for North- East (PM-DevINE), a new scheme for the development of the North Eastern States, with an initial allocation of INR15 billion, will fund infrastructure, in the spirit of PM Gati Shakti, and social development projects based on felt needs of the region The scheme will enable livelihood activities for youth and women,
The strengthening of health infrastructure, speedy implementation of the vaccination programme, and the nation-wide resilient response to the current wave of the pandemic, have been at the top of GoI’s agenda, for dealing with the present pandemic scenario, and making the country future ready to effectively address and manage pandemic situations.
Inclusive Growth and Welfare
Apart from the massive investment proposed for infrastructure, the Budget also prioritizes inclusive welfare and growth, while giving a short shrift to politically convenient sops and subsidies. Some of the prominent announcements for attaining inclusive growth are as follows:
Modernizing the agriculture sector
Delivery of digital and hi-tech services to farmers with involvement of public sector research and extension institutions along with private agri-tech players and stakeholders of agri-value chain, a scheme in PPP mode; promoting ‘Kisan Drones’ for crop assessment, digitization of land records, spraying of insecticides, and nutrients; promoting zero-budget and organic farming, modern-day agriculture, value addition and management; raising fund with blended capital, under the co-investment model, facilitated through NABARD, to finance startups for agriculture & rural enterprise, which will support FPOs, machinery for farmers on rental basis at farm level, and technology including IT-based support; implementing the Ken-Betwa Link Project, at an estimated cost of INR 446.05 billion, aimed at providing irrigation benefits to 0.91 million hectare of farmers’ lands, drinking water supply for 6.2 million people, 103 MW of Hydro, and 27 MW of solar power; support to concerned states for implementing the linking of five rivers, viz. Damanganga-Pinjal, Par-Tapi-Narmada, Godavari-Krishna, Krishna-Pennar and Pennar-Cauvery; a comprehensive package for promoting food processing with participation of state governments, which would facilitate farmers to adopt suitable varieties of fruits and vegetables, and to use appropriate production and harvesting techniques.
Revamping the MSME Sector
Interlinking Udyam, e-Shram, NCS and ASEEM portals, to provide services related to credit facilitation, skilling, and recruitment with an aim to further formalise the economy and enhance entrepreneurial opportunities for all; extending Emergency Credit Line Guarantee Scheme (ECLGS) up to March 2023 and expanding its guarantee cover by INR 500 billion to total cover of INR 5 trillion, with the additional amount being earmarked exclusively for the hospitality and related enterprises; revamping the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme to facilitate additional credit of INR 2 trillion for Micro and Small Enterprises and expand employment opportunities; and rolling out the Raising and Accelerating MSME Performance (RAMP) programme with outlay of INR 60 billion over 5 years to help the MSME sector become more resilient, competitive and efficient.
Creating a Strong Digital Ecosystem
Aligning the National Skill Qualification Framework (NSQF) with dynamic industry needs; launching Digital Ecosystem for Skilling and Livelihood – the DESH-Stack e-portal; promoting startups to facilitate ‘Drone Shakti’ through varied applications and for Drone-As-A-Service (DrAAS); Establishing Digital University to provide access to students across the country for world-class quality universal education with personalised learning experience at their doorsteps; rolling out an open platform, for the National Digital Health Ecosystem; and launching a ‘National Tele Mental Health Programme’ to improve the access to quality mental health counselling and care services.
Women Empowerment and Child Development
Mission Shakti, Mission Vatsalya, Saksham Anganwadi and Poshan 2.0 were launched recently to provide integrated benefits to women and children. The new generation The Budget has proposed to upgrade 0.2 million anganwadis to Saksham Anganwadis, with improved infrastructure.
Housing and Drinking Water for All
Universal coverage of low-cost housing and access of every household to tapped drinking water, aim at ease of living for all.Therefore, under the PM Awas Yojana, 8 million houses are expected to be completed during 2022-23. Currently, 87 million households have access to drinking water under Har Ghar, Nal Se Jal. The scheme aims to cover 38 million households in 2022-23.
Addressing Rural-Urban Divide
Aspirational Districts Programme
Under the Aspirational Districts Programme improvement in the quality of life of citizens in the most backward districts of the country has been observed, 95% of those 112 districts having made significant progress in key sectors such as health, nutrition, financial inclusion and basic infrastructure, surpassing the state average values. However, some blocks in those districts, continue to lag. Therefore, in 2022-23, the programme will focus on such blocks in those districts, under the Aspirational Blocks Programme.
Vibrant Villages Programme
A new Vibrant Villages Programme will be implemented in villages on the northern border, with sparse population, limited connectivity and infrastructure. The activities under the programme will include construction of village infrastructure, housing, tourist centres, road connectivity, provisioning of decentralized renewable energy, direct to home access for Doordarshan and educational channels, and support for livelihood generation. Existing schemes will be converged with this programme.
Digital Financial Inclusion
Post Offices under core banking system
100% of 1.5 lakh post offices will come on the core banking system enabling financial inclusion and access to accounts through net banking, mobile banking, ATMs, and also provide online transfer of funds between post office accounts and bank accounts.
Digital Banking Units
75 Digital Banking Units (DBUs) are proposed to be set up in 75 districts of the country by Scheduled Commercial Banks.
Financial support for digital payment
Financial support for digital payment ecosystem announced in the previous Budget will continue in 2022-23.
Major sectors of the Indian economy need to become globally competitive, if India is to grow rapidly and sustainably over the next quarter of a century to transform itself into a global economic powerhouse. Some of the major announcements in this regard are as under:
Ease of Doing Business 2.0 & Ease of Living
The next phase of EODB and Ease of Living would aim to improve productive efficiency of capital and human resources, with the government following the idea of ‘trust-based governance’. Active involvement of the states, digitization of manual processes and interventions, integration of the central and state-level systems through IT bridges, a single point access for all citizen-centric services, and a standardization and removal of overlapping compliances, are expected.
Energy Transition, Climate Action and Circular Economy
The Hon’ble Prime Minister of India, at the COP26 summit in Glasgow had said, “what is needed today is mindful and deliberate utilization, instead of mindless and destructive consumption.” The low carbon development strategy indicates the government’s strong commitment towards sustainable development. The Budget has announced the following short-term and long-term actions:
Additional allocation for PLI
An additional allocation of INR195 billion for PLI for manufacture of high efficiency modules, in order to facilitate domestic manufacturing for achieving the ambitious goal of 280 GW of installed solar capacity by 2030.
Transition to circular economy
The transition to circular economy is expected to help in productivity enhancement as well as creating large opportunities for new businesses and jobs. While the action plans for ten sectors such as electronic waste, end-of-life vehicles, used oil waste, and toxic & hazardous industrial waste are ready, the Budget identifies policy focus on addressing important cross cutting issues of infrastructure, reverse logistics, technology upgradation and integration with informal sector.
Transition to carbon neutral economy
While five to seven per cent biomass pellets will be co-fired in thermal power plants resulting in CO2 savings of 38 MMT annually, it will also provide extra income to farmers and create job opportunities, while helping avoid stubble burning in agriculture fields.
India @100 will have nearly half its population living in urban areas. The government plans to nurture the megacities and their hinterlands to become current centres of economic growth and also to facilitate tier 2 and 3 cities to take on the mantle in the future to realise the country’s economic potential, including livelihood opportunities for the demographic dividend. States would be involved as partners in the process of urban planning and development, with financial support from the Central Government. The government also plans to promote a shift to use of public transport in urban areas, which will be complemented by clean tech and governance solutions, special mobility zones with zero fossil-fuel policy, and EV vehicles.
The Budget highlights the importance of telecommunication in general, and 5G technology in particular, as an enabler of growth and creation of employment opportunities. Spectrum auctions will, therefore, be conducted in 2022 to facilitate rollout of 5G mobile services within 2022-23 by private telecom providers. Further, a scheme for design-led manufacturing will be launched to build a strong ecosystem for 5G as part of the PLI Scheme.
India needs to develop into an export-led economy if it is to grow into a $40 trillion economy by India@100. The Budget has announced that the Special Economic Zones Act will be replaced with a new legislation that will enable the states to become partners in ‘Development of Enterprise and Service Hubs’. This will cover all large existing and new industrial enclaves to optimally utilize available infrastructure and enhance competitiveness of exports.
Development of Sunrise Sectors
The Budget underscores the immense potential of Artificial Intelligence, Geospatial Systems and Drones, Semiconductor and its eco-system, Space Economy, Genomics and Pharmaceuticals, Green Energy, and Clean Mobility Systems, in achieving sustainable development at scale, modernizing the country, and also in creating employment opportunities for the youth, while making Indian industry more efficient and competitive.
Mission $40 trillion by India@100
The Union Budget 2022-23 is futuristic and has presented a blueprint to transform India into a leading global economic power by the year 2047. India’s nominal GDP in 2021-22 is estimated at INR 232.1 trillion, which is just over $3.1trillion, well short of $5 trillion by 2024-25.
Can India become a $40 trillion economy by India@100?
While the target may seem humongous, the basic ingredients for achieving the vision have been presented in the Budget, with a focus on investment in infrastructure and other capital investments, raising overall productivity in major sectors of the economy, export promotion, development of sunrise sectors, modernizing the agriculture and food processing sectors, comprehensive development of the North Eastern Region and aspirational blocks, and climate action for sustainable and inclusive development.
The Indian economy is poised to grow at 9.2% in FY22 (Figure 1) as per the First Advance Estimate of the country’s Gross Domestic Product (GDP) (at 2011-12 prices) estimated by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), Government of India. This is against a pandemic-induced contraction of 7.3% suffered by the economy in FY21. The real GDP is estimated to increase by 1.3% over that of the pre-pandemic year (FY20).
It is pertinent to note is that, notwithstanding a favourable base effect, the economy is set to record a higher GDP compared to the pre-pandemic year FY20, due to favourable policy environment, resulting in a positive investment growth, as reflected in the Gross Fixed Capital Formation (GFCF).
The nominal GDP is set to grow at a robust 17.6% in FY 22, compared to -3.0% in FY 21. The FY22 nominal GDP, estimated at INR 232.15 trillion (USD 3.12 trillion) is expected to be 14.1% higher than that of the pre-pandemic year (FY20) at INR 203.51 trillion (USD 2.74 trillion). The economy which was on a decelerating mode during the three pre-pandemic years, (real GDP growth at 6.8%, 6.5% and 4.0% respectively during FY18, FY19 and FY20 and nominal GDP growth at 11.0%, 10.5% and 7.8%, respectively), is set to achieve a robust growth 9.2% (real GDP) and 17.6% (nominal GDP) in FY22 (Figure 1).
The real Gross Value Added (GVA) in FY22 is estimated to grow at 8.6% (Table 1). The GVA data reveals that all sectors of the economy except ‘trade, hotels, transport, communication and services related to broadcasting’ (which are still 8% below the pre-pandemic level) reached the pre-pandemic level (on constant prices).
The agriculture sector, which was the only sector unaffected by the pandemic in terms of real GVA growth in FY21, is estimated to grow steadily at 3.9%, compared to 3.6% in the previous year and 4.3% in FY20. The industrial sector is expected to achieve a robust recovery, with manufacturing; mining and quarrying; electricity, gas and water supply; and construction, set to grow at 12.5%, 14.3%, 8.5% and 10.7%, respectively (Table 1). Under the services sector, trade, hotels, transport, communication and services related to broadcasting, which was the hardest hit during the pandemic is estimated to grow at a robust 11.9%. However, financial, real estate, and professional services, etc. is estimated to grow at a less impressive 4.0%. Public administration, defence, etc. is estimated to grow at 8.6% (Table 1).
On the expenditure side, Private Final Consumption Expenditure (PFCE) is still 3% below the pre-pandemic level, and its share in GDP is observed to be on a declining trend from 57.1% in FY20, to 56% in FY 21 and further down to 54.8% in FY22 (Figure 2). This is a cause for concern as India’s growth story has essentially been a consumption led one. Loss of lives, livelihoods, jobs and income caused by the pandemic have depressed private consumption.
Another concern is the decline in the share of Government Final Consumption Expenditure (GFCE) in GDP, from 11.7% (FY21) to 11.6% (FY22) (Figure 2). A steady and sustainable growth in GDP can be sustained with a higher share of GFCE, as it crowds in private investment. While fiscal consolidation is of prime importance for attaining high, steady and sustainable growth, it is imperative to recalibrate the same to address the serious impact of the pandemic on the economy.
According to research by SBI (Ecowrap, 07 Jan, 2022), “taking into account the revised GDP figures of today, even if we consider the additional spending announced by the Government in early December 2021 fiscal deficit of the Government still comes at INR 15.88 trillion (USD 0.21 trillion) or 6.8% of the GDP. For FY23, the fiscal consolidation should remain limited to 30-40 bps from the current fiscal”.
A silver lining in the expenditure side is the increase in the share of Gross Fixed Capital Formation (GFCF) in GDP to 32.9% in FY22 (Figure 2), the highest level in the last five years. The primary driver for higher GFCF is the investments made to meet the growing pent-up demand in the economy. The focus of GoI on investment in infrastructure and the Performance Linked Incentive (PLI) Scheme, should lead to accelerated growth in investments, leading to a higher and more sustainable growth in GDP.
According to the NSO, the First Advance Estimates (FAE) of GDP, introduced in 2016-17 to serve as essential inputs to the Budget exercise, is based on limited data and compiled using the Benchmark-Indicator method i.e., the estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.
While there could be some amount of under- or over-estimation of GDP in the FAE, the subsequent estimations, could be within 20-30 basis points, on either side. There could possibly be an upward bias in the revised estimates for FY22. However, it again depends on the impact of the prevailing omicron variant OF Covid-19 on contact-intensive sectors of the economy. Nevertheless, SBI has stuck to its estimate of 9.5% growth in FY22. Earlier estimates by RBI and IMF also point to a 9.5% growth for the Indian economy, while OECD’s estimate is a tad lower at 9.4%, which would still be higher than the growth estimates for China at 8% (IMF) and 8.1% (OECD), making India the fastest growing large economy in the world.