New Delhi

India to likely to witness GDP growth of 8-8.5% in 2022-23, supported by widespread vaccine coverage, gains from supply-side reforms and easing of regulations, robust export growth, and availability of fiscal space to ramp up capital spending, according to the Economic Survey 2021-22 which was tabled in the Parliament yesterday by the Union Minister for Finance & Corporate Affairs Nirmala Sitharaman.

The survey states that the year ahead is well poised for a pick-up in private sector investment with the financial system in a good position to provide support to the revival of economy. The growth projection for 2022-23 is based on the assumption that there will be no further debilitating pandemic related economic disruption, monsoon will be normal, withdrawal of global liquidity by major central banks will be broadly orderly, oil prices will be in the range of $70-$75/bbl, and global supply chain disruptions will steadily ease over the course of the year.

The Survey says, the above projection is comparable with the World Bank’s and Asian Development Bank’s latest forecasts of real GDP growth of 8.7% and 7.5% respectively for 2022-23. As per the IMF’s latest World Economic Outlook (WEO) growth projections released on 25th January, 2022, India’s real GDP is projected to grow at 9% in both 2021-22 and 2022-23 and at 7.1% in 2023-24. This projects India as the fastest growing major economy in the world in all these three years.

Referring to First Advance Estimates, the Survey states that the Indian economy is estimated to grow by 9.2% in real terms in 2021-22, after a contraction of 7.3% in 2020-21. This implies that overall economic activity has recovered past the pre-pandemic levels. Almost all indicators show that the economic impact of the “second wave” in Q1 was much smaller than that experienced during the full lockdown phase in 2020-21, even though the health impact was more severe.

According to Survey, the industrial sector went through a sharp rebound from a contraction of 7% in 2020-21 to an expansion of 11.8% in this financial year. The manufacturing, construction and mining sub-sectors went through the same swing although the utilities segment experienced a more muted cycle as basic services such as electricity and water supply were maintained even at the height of the national lockdown. The share of industry in GVA is now estimated at 28.2%. 

The Survey states that the services sector has been the hardest hit by the pandemic, especially segments that involve human contact.  This sector is estimated to grow by 8.2% this financial year following last year’s 8.4% contraction. It should be noted that there is a wide dispersion of performance by different sub-sectors. Both the finance /Real Estate and the Public Administration segments are now well above pre-COVID levels. However, segments like Travel, Trade and hotels are yet to fully recover. There has been a boom in software and IT-enabled services exports even as earnings from tourism have declined sharply.

The Survey added that total consumption is estimated to have grown by 7.0% in 2021-22 with government consumption remaining the biggest contributor as in the previous year. Government consumption is estimated to grow by a strong 7.6% surpassing pre-pandemic levels. Private consumption is also estimated to have improved significantly to recover 97% of corresponding pre-pandemic output level and it is poised to see stronger recovery with rapid coverage in vaccination and faster normalization of economic activity.

According to the Survey, investment, as measured by Gross Fixed Capital Formation (GFCF) is expected to see strong growth of 15% in 2021-22 and achieve full recovery of pre-pandemic level. Government’s policy thrust on quickening virtuous cycle of growth via capex and infrastructure spending has increased capital formation in the economy lifting the investment of GDP ratio to about 29.6% in 2021-22, the highest in seven years. While private investment recovery is still at a nascent stage, there are many signals which indicate that India is poised for stronger investment. A sturdy and cleaned-up banking sector stands ready to support private investment adequately.

On the Exports and Imports front, the Survey states that India’s exports of both goods and services have been exceptionally strong so far in 2021-22. Merchandise exports have been above $30 billion for eight consecutive months in 2021-22, despite many pandemic related global supply constraints. Net services exports have also risen sharply, driven by professional and management consulting services, audio visual and related services, freight transport services, telecommunications, computer and information services. From a demand perspective, India’s total exports are expected to grow by 16.5% in 2021-22 surpassing pre-pandemic levels. Imports also recovered strongly with revival of domestic demand and continuous rise in price of imported crude and metals. Imports are expected to grow by 29.4% in 2021-22 surpassing corresponding pre-pandemic levels. Resultantly, India’s net exports have turned negative in the first half of 2021-22, compared to a surplus in the corresponding period of 2020-21. But current account deficit is expected to remain within manageable limits.

Further, the Survey points out that despite all the disruptions caused by the global pandemic, India’s balance of payments remained in surplus throughout the last two years. This allowed the Reserve Bank of India to keep accumulating foreign exchange reserves, which stand at $634 billion on December 31, 2021. This is equivalent to 13.2 months of imports and higher than the country’s external debt.

The Survey expresses that another distinguishing feature of India’s economic response has been an emphasis on supply-side reforms rather than a total reliance on demand management. These supply-side reforms include deregulation of numerous sectors, simplification of processes, removal of legacy issues like ‘retrospective tax’, privatization, production-linked incentives and so on. Even the sharp increase in capital spending by the Government can be seen as both demand and supply response as it creates infrastructure capacity for future growth.

There are two common themes in India’s supply-side strategy: (i) Reforms that improve flexibility and innovation in order to deal with the long-term unpredictability of the post-Covid world. This includes factor market reforms; deregulation of sectors like space, drones, geospatial mapping, trade finance factoring; process reforms like those in government procurement and in telecommunications sector; removal of legacy issues like retrospective tax; privatization and monetization, creation of physical infrastructure, and so on. (ii) Reforms aimed at improving the resilience o the Indian economy. These range from climate/environment related policies; social infrastructure such as public provision of tap water, toilets, basic housing, insurance for the poor, and so on; support for key industries under Atmanirbhar Bharat; a strong emphasis on reciprocity in foreign trade agreements, and so on.

An important theme that has been discussed through the course of the Economic Survey is that of ‘process reforms’. It is important to distinguish between deregulation and process reforms. The former relates to reducing or removing the role of government from a particular activity. In contrast, the latter broadly relates to simplification and smoothening of the process for activities where the government’s presence as a facilitator or regulator is necessary.

The Survey points out that the last two years have been difficult for the world economy on account of the COVID-19 pandemic. Repeated waves of infection, supply-chain disruptions and more recently, global inflation have created particularly challenging times for policy-making. Faced with these challenges, the Government of India opted for a ‘Barbell Strategy” that combined a bouquet of safety-nets to cushion the impact on vulnerable sections of society and the business sector. It next pushed through a significant increase in capital expenditure on infrastructure to build back medium-term demand as well as aggressively implemented supply-side measures to prepare the economy for the sustained long-term expansion. This flexible and multi-layered approach is partly based on an “Agile” framework that used feedback-loops, and the monitoring of real-time data.

In conclusion, the survey is quite optimistic that overall macro-economic stability indicators suggest that the Indian economy is well placed to take on the challenges of 2022-23 and one of the reasons that the Indian economy is in good position is its unique response strategy.