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Dr Arun Singh
Dr Arun Singh

Global Chief Economist
Dun & Bradstreet


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Resilience in Indian Economy

The waves of COVID-19 infections caused significant disruptions to the Indian economy, putting its collective resilience to test. It led the Indian economy to witness one of the steepest contractions in the first quarter of FY 2021, though it started recuperating in the second half of FY 2021. The accelerated pace of vaccination Along with well-crafted fiscal and monetary policies helped the economy to get on the recovery path, placing it among the fastest growing economies of the world. Just when the green shoots of economic growth were visible, the Russia-Ukraine crisis struck the Indian economy. The geopolitical tensions and persistent supply chain woes led to a surge in global crude oil and other commodity prices and deterioration in global investors’ sentiment, which had ripple effects on the Indian economy in terms of higher domestic inflation, foreign portfolio outflows and rising import bills. However, the Indian economy is expected to re-emerge from this short-term turbulence and maintain its growth momentum on the back of strong underlying economic fundamentals.

Indian Economy: Rebounding from sharp contraction.

The COVID-19 pandemic took a heavy human and economic toll in the first half of FY 2021, with both industry and services sectors registering a sharp decline in economic activities. Indicators such as demand for electricity and petroleum consumption showed a steep decline, especially during Q1 FY 2021 pointing towards a fall in economic activity and mobility due to the pandemic-led lockdowns. Nonetheless, agriculture and allied activities alone turned out to be silver lining during the first half of FY 2021. In the same period, while growth in private consumption and investment demand remained negative due to weak consumer and investor confidence, sharp uptick in the government spending, especially during the first quarter cushioned the initial blow of the pandemic on the GDP.

After contraction in GDP for two consecutive quarters of 2021, the domestic economic activity rebounded in the second half of FY 2021 on account of turnaround in investment and private consumption demand. The progressive unlocking, onset of the festive season and the pent-up demand teamed up with continued policy support to help the GDP growth swing back in the positive territory. The recovery in the manufacturing activity was broad based as 15 out of 23 industry groups in the manufacturing sector showed expansion during the second half of FY 2021. The reopening of global economies and some recovery in supply chains also aided India’s exports growth.

FY 2022 has been altogether a different playing field. The agriculture sector continued to show great resilience in FY 2022 as well which stimulated demand in the rural areas. The rebound in consumer confidence in FY 2022 was further reflected in the business optimism levels. The uptick in government expenditure on infrastructure also provided much required impetus to the economy. Moreover, India achieved its export target for the first time ever as India’s merchandised exports rose by 44% in FY 2022 to USD 419.6 bn on the back of higher international commodity prices and recuperating global demand. The impressive growth in exports was primarily led by sectors such as petroleum products, engineering, gems & jewelry and chemicals.

While the domestic economy was getting back on track, sporadic outbreaks of coronavirus variants continued to curtail economic activity during FY 2022. Supply-chain related challenges also hampered the manufacturing sector during FY 2022. Shortage of raw materials due to supply-chain issues, surge in international energy and commodity prices and high logistics costs had bearing on input prices. Global crude oil and commodity prices soared to multiyear high due to tensions between Russia and Ukraine which are major commodity producers and exporters. This has exerted upward pressure on domestic wholesale and retail prices. High and sticky core inflation is daunting as corporates face margin pressure due to high input costs which ultimately erode corporate earnings. The risks posed by the geopolitical tension in terms of higher prices and supply side disruptions, broadening of growth impulses and rapidly generalizing inflationary pressures led the RBI’s monetary policy committee to announce a surprise policy repo rate hike of 40 bps to 4.40% in an off-cycle meeting in May 2022. The US Fed rate was also hiked by a half percentage point to 0.75-1% in May 2022.

Despite the domestic economic recovery gaining ground, elevated global and domestic prices, hike in policy rates by global central banks, tightening/withdrawal of global monetary policy stimulus, persistent risk of the COVID-19 outbreaks along with geopolitical tensions hampered foreign investors’ sentiment in FY 2022. Foreign portfolio investors pulled out USD 16 bn from the Indian markets in FY 2022 as against a net inflow of USD 36 bn in FY 2021. The heightened risk aversion amongst foreign investors was also reflected in the FDI inflows which registered a growth of mere 2% to USD 83.5 bn in FY 2022 as against a growth of 10% in FY 2021.

Policy measures to aid economic recovery.

In FY21 and FY22, the government introduced various policy measures to boost manufacturing and exports, address infrastructure hurdles and attract fresh foreign capital in the economy. Here are some key initiatives:

Economic recovery - Resilience in Indian Economy
  • The government has been implementing Production Linked Incentive (PLI) scheme for 14 key sectors of manufacturing which is expected to enhance India’s manufacturing capabilities and exports as well as help achieve its vision of becoming ‘Atmanirbhar’.
  • Further, PM Gati Shakti master plan is a transformative approach for economic growth and sustainable development.
  • The multi-modal connectivity plan launched in October 2021 aims to integrate road, railway, airport, ports and economic zone projects across the country. The initiatives under this plan are expected to bring down logistic costs, reduce inefficiencies in the supply chain in turn enhancing competitiveness of Indian manufacturing sector.
  • The government has also continued with its agenda of FDI liberalization agenda having relaxed the FDI investment norms in insurance sector (raised FDI limit from 49% to 74%), petroleum & natural gas (100% FDI under automatic route) and telecom sector (100% FDI under automatic route).
  • In the current scenario, the government and the RBI are seen working in a coordinated manner toward balancing growth and inflation concerns. The introduction of Standing Deposit Facility (SDF) by the RBI and increase in cash reserve ratio (CRR) by 50 bps has enabled it to absorb excess liquidity from the market.
  • The RBI also announced a 90-bps hike in policy repo rate to 4.90% during May and June as rapidly generalizing inflationary pressures could not be ignored further.

After a long gap, India has resumed its engagement with trade pacts which opens up an opportunity to make the Indian economy export oriented.

Indian Economy: The way ahead

Global growth slowdown, spillover effects of global monetary policy tightening, uncertainty surrounding the end of Ukraine crisis and outbreaks of new coronavirus variants have significantly clouded India’s economic outlook. The prolonged geopolitical tensions along with resurgence in COVID-19 infections globally as well domestically will have more severe implications on investors’ sentiment, supply chains and global energy & commodity prices, posing substantial downside risk to India’s economic growth.

Despite the RBI’s monetary policy actions and the duty cuts by the government, prices are expected to remain elevated in the near-term primarily due to supply-side woes and global commodity price dynamics.

As regards the growth outlook, the robust government capex plan is expected to have a multiplier effect. With normalizing economic activity, improved capacity utilization and stronger corporate balance sheet, private investment activity is also expected to gain momentum. The growing vaccination coverage will sustain revival of contact-intensive services sectors. Thus, though the evolving geopolitical situation may cause short-term turbulence, the strong underlying fundamentals of the Indian economy will help it to be on the recovery path.

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