Forbes India – Economy, Omnicron: With 3rd wave extended, it will be naive to expect business to be business as usual: Abheek Barua


Somewhat weak inflation figures in Q3 2021 are expected to be transitory
Image: Balaji Srinivasan / Shutterstock

TThe Indian economy has rebounded strongly in 2021-2022 from its depths last year. Unless there is a massive third wave of Covid-19 on the Omicron variant, it looks set to grow by at least 9.5%. There was a certain inevitability to this sharpness of the rebound. Simple arithmetic suggests that when income levels return to normal after a sharp contraction, growth rates are likely to be quite dramatic. Add to this the fact that the contraction was caused by a forced reduction in economic activity (mostly, buying and consuming activity) to contain the spread of the virus, and you have a situation where repressed consumption has to expand as the economy reopens, giving growth a pop.

However, to view the recovery as a purely mathematical pipe dream or simply as the release of pent-up demand is misleading. A number of things have happened in the two years of Covid-19. The digital economy and platform-based delivery services have grown significantly. Due to the need to go digital as containment measures restricted mobility, fintech and edtech, for example, have taken a leap forward.

IT companies have seamlessly transitioned to remote working and have seen an increase in demand for their services as businesses globally focus on reducing costs. With the expansion of businesses, companies in these sectors experienced a wave of hiring, resulting in increased wages and expenses. The banking and financial services industry has joined in the anticipation of business growth. These have helped consumer demand and may hold up.

Exports also performed well with the reopening of buyer countries. While a recovery in buying economies has helped, the story of Indian exports goes beyond the purely “cyclical”. There is evidence to suggest that the so-called “China + 1” phenomenon is taking place in industries such as textiles and electronics. Global producers seeking to diversify their sources of supply have turned more to India over the past two years, resulting in what may well be a “structural” shift upward in Indian exports.

High international commodity prices, a completely unexpected housing boom and a more recent recovery in infrastructure have pushed up profits and boosted capacity utilization in sectors such as cement and steel. Overall, the corporate sector performed well with sales in the second quarter of 2021-2022 up 32% and around 50% for profits passing through a fairly comprehensive sample of companies compiled by the Reserve. Bank of India (RBI).

Many of these companies reach a point where they can no longer sweat their machines or their workforce to produce more. If demand continues, they will be forced to increase their capacity and hire more employees. This could trigger a cycle of rising investment and employment in a number of sectors. All of this could mean that over the next two years India’s gross domestic product (GDP) could grow in the order of seven percent, if the peaks and troughs produced by the “base effects” are. deleted.

There are issues that could be obstacles to growth. Manufacturers who cater to the lower levels of the income pyramid complain about a lack of demand for their products. Two-wheelers are a classic example where sales of entry-level models are at half mast while the high-end segments are doing well. There is evidence for the same phenomenon in other segments and could be manifestations of an uneven K-shaped recovery.

Macroeconomic data on private consumption seems to corroborate this as its share in aggregate demand has declined and its absolute level is well below pre-Covid levels. An asymmetric recovery could limit the size of the market, push incomes into the hands of those with relatively low propensity to consume, and dampen growth momentum.

The other problem, of course, is stubborn inflation and the central bank’s efforts to curb it with tighter monetary policy. The dominant narrative that shapes monetary responses has undergone a major shift in the past three months. While consumer price inflation has reached ten-year highs in developed economies (retail price inflation in the United States is also at its highest in 40 years), monetary authorities have shifted their focus. tactical.

Instead of seeing high inflation as the transitory effect of supply shortages, they see it as a more entrenched long-term problem that needs to be addressed head-on. The US central bank has embarked on a cut that would reduce its monthly injection of $ 120 billion into the economy (aimed at mitigating the impact of Covid-19) to zero over eight months, if not earlier. While that itself has pushed up interest rates, most analysts expect it to hike its key rate in the first half of 2022. That would push dollar interest rates further up.

Inflation is also a problem in India and the somewhat weak numbers for Q3 2021 are likely to be transitory. Core inflation (which excludes volatile items like food and fuel) is close to six percent, and headline inflation could exceed the six percent target. The RBI appears to be somewhat benign in its policy statements, but it is working somewhat hard behind the scenes to “normalize” the liquidity of the financial system and allow market rates to rise. Persistent inflation is expected to strain the RBI’s hand, and the repo rate could take off by mid-2022.

Economic recovery is generally associated with increased imports in a globally integrated economy like India. India imports a wide range of commodities, from crude to vegetable oil to metals, and high commodity prices across the board as well as higher volume growth have sharply increased the bill. of imports from India. So despite the recovery in exports, India’s trade deficit from April to November stood at $ 119 billion, up from $ 44 billion last year. However, large capital inflows “paid” the deficit and the rupee hardly budged.

The change in global monetary policy could alter this balance. Lax monetary policy in Western economies has effectively pushed excess dollars and euros into markets like India in an attempt to seek higher returns on portfolio investments. As these moderate with the reduction, a high trade deficit could mean some depreciation of the rupee. However, the risk of an external sector crisis of the type seen during the infamous taper tantrum of 2013 is low. The RBI holds around $ 635 billion in reserves, which could cover the average import bill for more than 13 months. He could use them to meet a sudden rush in demand for dollars and a run for the rupee seems unlikely.

The elephant in the room remains Omicron. Cognitive scientists speak of ‘learning by doing’ and it is likely that two vicious waves of the virus have left Indian companies with the means to deal with production disruptions and bottlenecks in the supply chain and the industry. delivery. However, it would be naive to expect that even with a third wave extended, business would be business as usual.

The writer is chief economist and executive vice president of HDFC Bank

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(This story appears in the January 14, 2022 issue of Forbes India. You can purchase our tablet version at To visit our archives, click here.)


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