Year in Review | Indian economy amid global headwinds

Year in Review is an attempt to show the events that marked the year 2022. Here’s a recap of India’s economic indicators.

Multiple headwinds at varied points of time impacted the Indian economy’s thorough economic revival in the calendar year 2022. The year started with the threat emanating from the Omicron variant which settled towards the later end of the succeeding month. This was followed by the Russian actions in Ukraine and the ensuing disturbances in global supply chains and inflation. With advanced economies tightening their monetary policy stance, it affixed ripple effect in global markets and to the economies of emerging and low-income countries.

The Indian economy too was not aloof to the headwinds with the central regulator, the Reserve Bank of India (RBI), constantly alternating between focus on growth after easing of the Omicron-induced wave and combatting inflation by tightening their monetary policy stance.

Here are how the broader economic indicators panned out in 2022 and the currents that shaped them:

In the first half of the ongoing financial year, the Indian economy registered a GDP growth of 9.7% compared to 13.7% on a year-over-year comparison. Gross Value Added (GVA) rose 9% compared to 12.8% during the same period last year. GDP in the June-end quarter, though lower than the RBI’s projection, rose 13.5% aided by an uptick in private consumption spending and gross fixed capital formation with a moderation in government final expenditure.

In the September-end quarter with the normalisation of the base effect, GDP growth slowed to 6.3%. The mining and manufacturing sectors experienced contraction, combined with high inflation, weak exports and increased input prices in certain sectors led GVA rising slower-than-expected at 5.6%. “India’s growth rates in real terms of 9.7% in the first half of this year is well above the trend in other countries and is happening amid tightening global financial conditions and the commodity price shock since the Ukraine invasion by Russia,” CEA V. Anantha Nageswaran had emphasised.

Consumer Price Index (CPI) inflation, or retail inflation, was above the central regulator’s 6%-upper tolerability threshold for ten consecutive months before easing to 5.88% in November. It reached an eight-year high of 7.79% in April with rural inflation scaling to 8.4% and urban inflation at 7.1%. Analysts attributed the rise to the sharp spike in food inflation – which rose to a 17-month high of 8.4% from 7.7% on a sequential basis. They explained the continued global surge in crude prices impacted food, fuel, and light, as well as transport and communication.

In fact, adhering to the medium-term inflation targeting framework, the RBI conducted an additional meeting of the MPC in November this year to write a letter explaining the reasons for missing its inflation targets and chart details on when it would achieve the target of 4%. The ease in November was largely due to the correction in prices of food items. However, this was accompanied with the Index for Industrial Production (IIP), a composite indicator that indicates the short-term changes in the volume of production for a basket of industrial products during a given period in comparison to a base period, also contracting 4%. Retail inflation figures for the month of December would be published on January 12, 2023.

Standard & Poor’s Manufacturing Purchasing Managers’ Index (PMI) is a weighted average of indices constituting new orders, output, employment, suppliers’ delivery times, and stocks of purchases. It indicates the overall health of the economy and its key economic drivers as exports, capacity utilisation, employment and inventories, among other things.

With respect to India, the index recorded its best in July and August at 56.4 and 56.2 respectively. Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence had then observed that Indian manufacturers continued to benefit from the absence of COVID-19 restrictions. Rate of growth for both output and new orders were picking up yet again to the strongest since November 2021.

In November this year, it recorded its strongest upturn in output since August at 55.7. The researchers concurred that notwithstanding heightened recession fears elsewhere and a deteriorating outlook for the global economy, India’s manufacturing sector continued to perform well. They were also aided by a substantial cooling of cost pressures in November – prompting them to purchase more inputs and add to their inventories, the researchers stated.

The Monetary Policy Committee (MPC) in April voted unanimously voted to keep the repo rate unchanged at 4 per cent. It explained the decision was to “remain accommodative while focussing on withdrawal of accommodation to ensure that inflation remains with the target going forward, while supporting growth.” The Governor had stated the commencement of the geopolitical tensions in Eastern Europe from February 24th had induced “tectonic shift” in the global economy. Extreme volatility characterised commodity and financial markets.

The committee met off-cycle in May in lieu of the prevailing global macroeconomic situation. It voted unanimously to increase the policy repo rate by 40 basis points to 4.40%. It explained that global inflation was “rising alarmingly and spreading fast”, adding, “Geopolitical tensions are ratcheting up inflation to their highest levels in the last 3 to 4 decades in major economies while moderating external demand.”

In three subsequent cycles, RBI opted to raise the repo rates by 50 basis points on each instance. It peaked to 5.9% in September until in December, it moderated the rate of increase to 35 basis points, thus, the repo rate presently stands at 6.25%.

It had noted that that growth prospects globally were dampening and financial markets remain nervous and characterised by high volatility and price swings. As for the Indian economy, it stated, “The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions.” Notwithstanding, it stated the outlook was supported by sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services and robust credit expansion. 

The MPC is next slated to meet on February 6, 2023.

In December 2021, the Centre for Monitoring Indian Economy (CMIE) estimated that nearly 53 million Indians were unemployed, a large proportion being women. The unemployment rate was hovering at 7.91% in December 2021, and though there was some dip in unemployment in early 2022, the figure now stands at a worrying 8% (as of November 2022). CMIE’s Managing Director Mahesh Vyas had noted that most of the jobs added in November were in rural India and the increase in the unemployed was essentially in urban India. 

Further, separately he stated, “India’s unemployment rate has not crossed 8 per cent too often during non-lockdown times. In the past 17 months, the unemployment rate has crossed 8 per cent on four occasions,” he stated.

In August this year, unemployment had surged to one-year high as erratic rainfall impacted sowing activities, thus, translating into lower rural employment. Back then, the urban unemployment rate had gone on to touch 9.6% while rural unemployment touched 7.7%. In September, the unemployment rate had fallen drastically to 6.43% backed by an increase in labour participation in rural and urban areas. CMIE’s Managing Director Mahesh Vyas had told news-agency PTI back then that the almost 8-million increase in labour participation is a sign that India’s economy was doing well.

The Indian rupee hit an all-time low against the U.S. dollar this year weakening past the 82 rupees to a dollar mark. The value of any currency is determined by the demand for the currency as well as its supply. When the supply of a currency increases, its value drops. On the other hand, when the demand for a currency increases, its value rises. In the wider economy, central banks determine the supply of currencies, while the demand for currencies depends on the amount of goods and services produced in the economy. Since March this year, the U.S. Federal Reserve has been raising its benchmark interest rate causing investors seeking higher returns to pull capital away from emerging markets such as India and back into the U.S. This, in turn, has put pressure on emerging market currencies which have depreciated significantly against the U.S. dollar.