Economic Overview of India for FY 2021-22


After witnessing a significant contraction related to the COVID-19 pandemic in 2020, the global economy recovered in 2021. However, the momentum was slowed down in Q2 by a deadlier variant of the virus, the impact of which was fortunately short-lived helped largely by main vaccination drives across the world. Towards the end of Q4 FY2022, escalated geopolitical tension arising from the prolonged Russia-Ukraine conflict has led to increased financial volatility.

Oil and other commodity prices have surged significantly, thereby worsening the already high inflation dynamics of both dvanced as well as emerging and developing economies. Record inflation has led the US Fed to accelerate its monetary policy normalisation.

This, in turn, has led to capital outflows from the emerging markets as risk-off takes centre stage. Global growth is thus expected to moderate to 3.2% in 2022. Even the global trade estimates for 2022 have been revised downwards to 3.0%.

Against this backdrop, the Indian economy grew by 8.7% in FY2022. On the external front, India’s merchandise exports performance remained buoyant growing by 14.53% and crossing the $400 billion mark in FY2022. However, imports growth too remained strong at 55% during the year. Meanwhile, RBI increased the repo rate recently by 40 bps in an off-cycle meeting to rein in inflation, while supporting growth.

However, the hardening of global crude and commodity prices amidst prolonged geopolitical tensions, along with supply chain issues arising out of the prolonged lockdown in China could keep inflationary pressures on the upside. While India is expected to grow at 7.2% in FY2023, the current account deficit could breach 2.5% of GDP mainly due to geopolitical tensions and elevated crude oil prices.

Global Economic Scenario

The recovery of the global economy was hampered in Q4 of 2021, due to the resurgence of the omicron variant which led many countries to re-impose lockdowns, travel restrictions and other containment measures which disrupted economic activities and supply chains. The domestic economic scenario has also been affected by geopolitical events. RBI has lowered the FY23 GDP growth forecast to 7.2% from the earlier guidance of 7.8%. While possible upside could emanate from sustained domestic demand, Government’s thrust on Capex, a normal monsoon and healthier corporate balance sheets, the heightened geo-political tensions do pose downside risks to GDP growth.

Towards the end of FY 2022, the Russia-Ukraine conflict has led to heightened financial volatility. The price of crude and other commodities spiralled to multi-year highs. Amidst unsettled financial market conditions, demand for safe havens increased, thereby increasing the price of gold while diversification of reserves by central banks anchored other assets and currencies too. Meanwhile, emerging markets continue to witness capital outflows, as the US Fed accelerated its tapering of asset purchases, recently raised the Fed funds rate twice and signalled aggressive rate hikes. Against this backdrop, global growth is expected to moderate to 3.2% in 2022.

Meanwhile, inflation is likely to remain elevated in the near term, and inflationary pressures are likely to subside in the later part of the year. The recent lockdown in China is a grim reminder of the brittle recovery and the necessity of adhering to appropriate measures to check the unabated spread of the virus. The Russia-Ukraine conflict and lockdowns in China as part of its zero-tolerance approach toward the pandemic are weighing down on the global trade dynamics. This has led the WTO to slash the global goods trade growth forecast to 3% in 2022 from its previous forecast of 4.7%.

Prolonged situation in Ukraine along with unanchored inflation expectations and supply disruptions pose a significant downside risk to global growth prospects. With growth clouded by risks and uncertainty, it is imperative for countries, especially the developing ones, to continue to strengthen their digital and health infrastructure. All countries also need to focus on tackling climate change and growth-enhancing policy interventions to promote inclusive development and reforms that broaden economic activity.

India’s Economic Scenario

The recovery in real GDP growth with the ebbing of the second wave lost some momentum in H2FY2022 with the emergence of the Omicron variant which was fortunately short-lived. However, India’s economy grew by 8.7% in FY2022 as against the NSD’s earlier estimate of 8.9%.Gross Value Addition in agriculture and allied activities expanded by 3.3% in FY2022, supported by an adequate monsoon, good reservoir levels and improved soil moisture, which helped rabi acreage increase by 1.5% over the previous year. Food grain production touched a new record in FY2022, with both Kharif and Rabi’s output exceeding the final estimates for the year.

Industrial activity lost some momentum in the second half of FY2022, as manufacturing was affected by supply-side shortages and input cost pressures. Mining activity was supported by coal and natural gas, offsetting the contraction in crude oil production. Hence, industrial GVA decelerated sharply from 23.1% in H1 to 0.9% in H2.

Services sector activity grew by 7.1% in H2 and crossed its pre-pandemic level. The contact-intensive services, viz., trade, hotels, transport, and communication, inched towards normalisation, though their rebound was held back by the Omicron variant. Merchandise exports and imports remained buoyant in FY2022.

Exports at $42.2 billion in March 2022 touched a new record and remained above $30 billion for the 13th consecutive month. During FY2022, merchandise exports at $419.6 billion surpassed the target of $400 billion. The $300 billion mark in exports was achieved in FY12, and it took almost a decade to add an incremental $100 billion in exports.

Merchandise imports reached an all-time high of $60.7 billion in March 2022 and remained above $50 billion for the seventh consecutive month. Overall, India’s merchandise exports increased by 43.8% in FY2022 vis-à-vis a decline of 6.9% in FY2021, while imports grew by a whopping 55.1% in FY2022 compared to a 16.9% contraction in FY2021.

India recorded a current account deficit of 1.2% of GDP in April-December 2021 against a surplus of 1.7% in April- December 2020. Though CPI inflation is projected to average below 6.0% in FY2023 by RBI, there remain several risks to this forecast.

The risks could emanate from a further hardening of global crude and other commodity prices due to geopolitical tensions, longer supply chain disruptions, a larger pass-through of input cost pressures and volatility in the global financial markets induced by an affirmative normalisation of monetary policy by the advanced economies.

An early end to supply chain disruptions, a muted pass-through to output prices, a correction in global commodity prices and, an easing of geopolitical tensions would help in containing inflation within the projected levels. (India CSR)