2022 Outlook: Indian business and the economy

We are kickstarting 2022 with short conversations with some of our regular contributors about their outlook for the new year.

Here, we speak with Ritesh Kumar Singh, chief economist of Indonomics Consulting and former assistant director of the Finance Commission of India, about the prospects of the Indian economy in the new year, key areas of concern and some bright spots.

Unravel: What is your outlook for the Indian economy for 2022? 

Ritesh Kumar Singh: With the GDP back to its pre-pandemic level, one can be cautiously optimistic about the Indian economy’s growth prospects. As of now, many things are going well for India – despite initial poor planning and vaccine hesitancy, 64% of the adult Indian population is now fully vaccinated. This has reduced the fear of crowded spaces among people in general. That, in turn, is helping the hospitality and tourism sector as well as offline retail.

Exports are doing well too, and FDI inflows are robust. Information technology (IT) and tech startups are expected to do well in 2022. Net direct tax collection rose by over 60% to INR9.5 trillion ($127.5 billion) in FY 2021-22 as on 16 December. That should help contain the fiscal deficit at 6.8% of GDP. All of this makes one optimistic about India’s growth prospects in 2022.  

Unravel: What are some regulations/ policies you expect to see in the new year? 

Mr Singh: The withdrawal of the farm sector reforms is a big disappointment as it will encourage vested interests to oppose all kinds of reform actions. That remains my big worry in 2022. Yet another setback is the rollback of  provisions on abolition of electricity subsidies in the draft Electricity Bill, 2020.

Nevertheless, the Modi government is likely to push bank privatisation in 2020. There are also reports about the government reducing its stake in state-owned banks to 26%. If that really happens, it will reduce political interference in lending and ensure more efficient credit allocation across the economy.

Unravel: What are the key challenges the Indian economy is faced with? 

Mr Singh: Despite the official exuberance, there are several headwinds that can derail India’s premature economic recovery. For instance, the threat of another wave of the virus (Omicron) is still there. The Bank of England has already raised interest rates, so have the central banks of Chile, Brazil, Hungary, Mexico, Norway and Poland. The US Fed seems to be on course to start tapering off its bond purchase programme, and other major central banks, especially the European Central Bank, will soon join the bandwagon. Given this backdrop, the easy-money party is likely to end soon. We’ll have to see if the central banks are able to pull off a soft landing in 2022.

Impressive stock market returns in the last 12-14 months that might have benefitted a small minority of 15-20 million Indians have been providing support to demand for all kinds of high-value discretionary goods starting from premium houses, SUVs, clothing and white goods. Therefore, any sharp correction in stock prices will not be good news for the sellers of these relatively expensive items. To make matters worse, the producer’s price index is very high and that’s been raising input costs for all kinds of downstream businesses. Untamed commodity market inflation is adversely affecting the profitability prospects of multiple industries including automobile and auto components, infrastructure, real estate and capital goods.

Separately, household consumption is still below its pre-pandemic levels. Along with low-capacity utilisation, that has been keeping private investment muted. As of now, India’s GDP growth is primarily driven by exports and government spending, while the more important drivers, consumption and investment are not contributing enough. And while relatively larger, listed companies are doing well, the question remains for how long they will remain decoupled from the troubled informal sector. Similarly, while agriculture and manufacturing are relatively better off now, a large part of the country’s services sector still remains stressed.

Unravel: What are some bright spots for the Indian economy in the coming year? 

Mr Singh: As of now, the bright spots for the Indian economy are exports, IT and tech startups, e-commerce and to an extent, pharmaceutical companies, which have done well in 2021 and are expected to do well in 2022.