What is likely to happen for the country’s economy in 2022-23

First, the nature and drivers of economic growth in the fiscal year 2022-23. A declining epidemic caseload and improved vaccination rates give confidence to the outlook for 2022-23, with more than 90% of the adult population covered by at least the first dose and more than two-thirds fully vaccinated by the end of the year. has gone. The bar is high for a full-blown lockdown, with local restrictions likely to escalate in case of resurgence. Given the highly unpredictable path of the pandemic, especially the discovery of a highly transmissible and vaccine-resistant variant, Omicron, our base case poses some downside risks.

We are counting on better-balanced growth in India’s gross domestic product (GDP), led by a combination of improved demand due to higher vaccination rates, general mobility and regional production largely at pre-pandemic levels Is. According to survey data from the Center for Monitoring Indian Economy, jobs in the services sector declined somewhat during the second wave and since then more than 90% of the land has been laid off at pre-pandemic levels. The revival in manufacturing jobs is less than a quarter of the workforce at the end of 2019. Additionally, higher capital expenditure led by the public sector, government production-linked incentives, and a manufacturing incentive provided by ancillary schemes such as improved exports of goods (and services) are expected to be other drivers. We anticipate growth for 2022-23 to remain stable at 7% year-on-year, after an estimated 9.5% in 2021-22, the fastest in our Asia-10 universe. Despite this boom, the shield has some flaws, as the effects of the pandemic on labor markets and incomes are likely to be felt longer than the revival in other cyclical economic activity.

Second, as the emphasis on reopening and demand eases, we count on the capex generation as the next booster. Public spending will need to take the wheel initially, with private sector participation on benefits from better demand visibility, delivering, healthy balance sheets and quick formalization. Note that the total debt-to-equity ratio for a sample of cross-sector non-financial firms has decreased over the years.

A mix of catalysts is likely to increase multi-year capital expenditure. These include new institutional structures to support a strong infrastructure through the National Infrastructure Pipeline, efforts to facilitate the planning, monitoring and implementation of projects through the Gati Shakti initiative, and the National Monetization Program as well as infrastructure and National banks are involved to finance development. Meet funding requirements. At the regional level, tech startups and players in the digital economy can harness the domestic structural strength. As the number of players in the new age digital economy grows, there will be a need to maintain hard infra to support these businesses, for example to accommodate the high demand for time bound logistics among e-commerce players.

Climate action commitments and Cop-26 initiatives will require a strong emphasis toward non-fossil energy sources, including renewable energy and other clean energy expenditure. As of the third quarter of 2021-22, 40% of our total installed production capacity is through non-fossil fuel varieties. India has committed to meet 50% of its energy needs from renewable energy by 2030. This would require big-ticket new capex in states, in addition to sector-specific requirements, such as electric vehicles and green-hydrogen production. Some innovative ideas have been proposed, such as decentralized solar/wind clusters and complementary use of agricultural land for renewable energy generation. Thereafter, we can expect efforts to localize production along with promoting high value manufacturing exports in sectors such as machinery and electronics. A case in point is India’s $10 billion program to boost the domestic semiconductor industry, which can support external balance besides helping us reap the benefits of a thriving manufacturing base, labor absorption and upskilling opportunities. Several countries such as South Korea, Japan, the US and European countries are also in the midst of a similar chip-making push.

Third, we expect policymakers to formulate a post-Covid policy exit strategy next year. The Reserve Bank of India’s (RBI) move from fixed to variable reverse repo auctions is a stealthy normalization, as money market and short-term rates have adjusted. Reverse-repo hike is likely in February or mid-meeting, but it will be non-disruptive. The change in policy stance is set within the first half of 2022-23, followed by policy tightening with a 50-basis-point increase in the second half, when inflation is expected to hover above the middle. Point of RBI’s target range. In the wake of normalization steps by the US Fed and other G-10 central banks, India’s external buffers are comfortable, even as incremental forex reserves accumulation has eased. The Reserve Bank of India’s intervention strategy is likely to be more two-pronged in 2022, aimed at preventing excessive depreciation pressure on the rupee as the US dollar firms up amid higher rates and increased commodity prices. Sectoral price action to maintain trade competitiveness live in harmony with. Imported price includes pressure.

Fourth, consolidated centre-plus-state debt has risen from 75% in 2018-19 to nearly 90% of GDP, on account of higher spending through the pandemic and weak revenues amid a sharp decline in economic activity. At current levels, India’s general government debt is among the highest among similarly rated emerging-market sovereigns. The spread between the country’s nominal GDP and the nominal interest rate (with the 10-year bond yield as a proxy) will be positive at 40-50 basis points next year, but narrower than in 2021-22, increasing the cost of borrowing will help to reduce Taking into account our assumption of double-digit nominal GDP growth and the gradual consolidation of the combined deficit, we expect the country’s public debt level to fall to 86 per cent of GDP by mid-decade.

Radhika Rao is Senior Economist and Senior Vice President at DBS Bank, Singapore