economy

Economy likely to stay on the road to recovery amid inflation worries

Economy likely to stay on the road to recovery amid inflation worries

The Indian economy is expected to stay on the path of sustained recovery well into the next financial year, with high-frequency indicators showing stability and greater demand driving up consumption, aided by a cut in fuel taxes. Economists, however, have suggested a cautionary approach to fiscal policy thanks to uncertainty about the impact from the Omicron variant of covid, rising inflation and production hurdles due to component supply constraints. “The Indian economy seems to be on the right path of recovery as we complete almost nine months of the financial year. The stage would be set for higher accelerated growth in FY23, which can be in the region of 7-7.5%, said Madan Sabnavis, chief economist at CareEdge. Based on the progress made in terms of kharif prospects, industrial growth and opening of most services to optimal capacity, a growth of 9-9.2% is expected in FY22, Sabnavis said, noting that it should not be interpreted as a sharp recovery as it comes over the negative growth of last year. While Sabnavis flagged concerns around Omicron, he said that any serious lockdowns are unlikely, and restrictions, if any, would be confined more to some service segments. According to the economic outlook by the Organization for Economic Cooperation and Development (OECD), India’s recovery has gained momentum, and its GDP is projected to grow at 9.4% in FY22, before reverting to 8.1% in FY23 and 5.5% in FY24. “Inflation has remained close to the upper band of the Reserve Bank of India (RBI), but should ebb as supply chain disruptions are overcome, it said. Financial markets remain strong, and capital inflows support the build-up in reserves. Moody’s Investors Service, in its latest report, projected that economic growth in India would rebound strongly, pegging GDP growth for the country at 9.3% and 7.9% in FY22 and FY23, respectively. Rising consumption, India’s push for domestic manufacturing and benign funding conditions will support new investments, it noted. Government spending could also see a boost, with higher direct tax collections in FY22 versus the previous year. Net direct tax collection of the central government so far this year has touched ₹9.45 trillion, growing 60.8% from the year-ago period. Cumulative advance tax collections for the first, second and third quarters of FY22 was ₹4.59 trillion as of 16 December, compared to ₹2.9 trillion for the corresponding period of FY21, a growth of 53.5%. The government has managed its finances well, with steady revenues ensuring the year’s targets will be met. Expenditure has been calibrated, and there will not be any surprise by the end of the year, economists added. ICRA’s chief economist Aditi Nayar, however, noted, “The tepid IIP growth in October 2021 has imparted a note of caution, dampening the exuberance generated by the festive season at the start of this quarter. The index of industrial production (IIP) grew at 3.2% in October, with output growth dropping from 12% in August to 3.3% in September. Semiconductor shortages are expected to impact production in the coming quarters, an issue that the government aims to address in the long term with its new policy on semiconductor manufacturing. High-frequency indicators such as e-way bills, goods and service tax collections, electricity demand and port cargo traffic have been steady over the past few months, with some exceptions due to the second wave of covid. E-way bill generation had seen a steady growth from 1.2 million in May to 2.3 million in October, before moderating to 2 million in November. In the first five days of December, 2.1 million e-way bills were raised on average, GSTN data showed. GST collection of central and state governments has improved from ₹92,000 crore in June to ₹1.31 trillion in November, the second-highest since the GST roll-out. The pace of vaccination has also improved sharply, with India administering 828.2 million first doses and 537.2 million second doses. More than 1.36 billion doses have been administered in the country so far, which is 2.8 times the total doses administered in the US (486 million), as per government data. “People have learnt to live with the virus, and even with Omicron, the impact appears to have been limited, at least as of now. We will have to watch how Omicron pans out in India, but I believe the overall economy, consumer sentiment will not get a big blow in the coming quarters, said D.K. Joshi, chief economist at Crisil. Moody’s has cautioned that consumer sentiment could be eroded if India faces another wave of covid-19, which could dampen economic activity and consumer demand. “This could lead to a subdued Ebitda growth of less than 15-20% for Indian companies in the next 12-18 months, it had said. Delays in government spending, energy shortages that lower industrial production or softening commodity prices might just curtail companies’ earnings, it added. The OECD added that the appearance of a new virus variant, especially if combined with a relaxation of attitudes, is a major risk, together with a less supportive global economic and financial environment. Apart from a third wave, economy watchers have flagged rising inflation concerns. Annual wholesale price-based inflation surged to a record 14.23% in November, fuelled by rising prices of fuel, oilseeds, minerals, vegetable oils, basic metals, wheat and fruits. Consumer durables output had extended its contraction for the second month in October. “Inflation is a concern today, with WPI scaling a new high and CPI getting into the 5-6% range. This, in my opinion, is a result of a combination of factors like high global commodity prices, crop shortfalls in the domestic market, revision in prices of services due to higher costs, and cover-up for losses suffered during lockdowns (e.g. here is recreation, education, tourism), freight costs, etc. To my mind, we cannot control this inflation, and it is here to stay, Sabnavis said. “Moreover, the recent spate of price increases suggests margins have been under pressure this quarter. After the higher-than-expected net cash outgo sought under the second supplementary demand for grants, the pace of government spending is likely to crucially dictate whether the pace of GDP growth can meaningfully exceed 66.5% in Q3 FY22, ICRA’s Nayar added. Some have also pointed to the government’s slow progress in meeting its divestment target of ₹1.75 trillion, with strategic divestments of Bharat Petroleum Corp. Ltd and the big initial public offering of Life Insurance Corp. of India planned for this year. India’s move towards self-reliance in semiconductor manufacturing with a ₹76,000 crore incentive plan aims to protect itself from supply chain disruptions anticipated in the post-covid world. The country aims to achieve $1 trillion of exports of services and merchandise each by 2030, even as outbound shipments are expected to cross the $400 billion mark in this fiscal. However, India is not part of any major regional trading bloc after it walked out of the Regional Comprehensive Economic Partnership (RCEP), led by the Asean group of nations since the agreements were not benefiting India and would have led to higher imports than exports. Trade policy watchers said that India is already in negotiations with nearly 10 countries, including the European Union, the United Arab Emirates, the UK and Australia, to carve out trade pacts that can benefit the country. “Any new FTA which is signed needs to be evaluated on the cost-benefit to the Indian industry and should not impact ‘Make in India’ for crucial products, but create an export impetus by allowing preferential access to certain markets, said Bipin Sapra, partner at EY. The government has implemented a series of steps to promote exports of both goods and services, including the introduction of Remissions of Duties and Taxes on Exported Products (RoDTEP) and Rebate of State and Central Levies and Taxes (RoSCTL) Schemes, and has cleared several past dues to facilitate liquidity for trade. The government has been pushing ease of doing business by introducing a Common Digital Platform for Certificate of Origin and promoting districts as export hubs by identifying products with export potential in each district while clearing bottlenecks. The growth in exports and local supply assurance will also come from the recently introduced production-linked incentive (PLI) scheme in mobile, electronics and drugs and pharma sectors, which will further boost trade. Download.

economy 2021-12-20 Livemint