Economy did well on balance in 2022

One consequence of the buffeting that the global economy has been receiving through most of the year, which has affected India also, is that the employment picture has somewhat deteriorated. Since the Ukraine war began, the unemployment rate has actually been on a downward trend. But this is because seeing the poor condition of the job market, many have not offered themselves for work.

CRITICAL: Though 2022 began with retail inflation at 6%, the RBI’s tolerance level, and later rose after the Ukraine war, it has now gone below 6% mark. Reuters

Subir Roy

Senior Economic Analyst

THE year 2022 has seen sharp changes in the Indian economic landscape. Right early in the year, it experienced a Covid surge which curbed normal economic activity and impacted economic performance. This is after the previous year was severely hit by the most serious surge experienced so far.

Compared to this, the year ends on a virtually opposite positive note. The surge in infection being experienced by foremost China and also Japan, South Korea, Brazil and the US has so far not reached India and experts are hopeful that previous infection waves have built up critical immunity in the population.

This is likely to have a positive impact on the GDP growth rate. According to the IMF's October World Economic Outlook, India is expected to clock a highly respectable 6.8 per cent growth in 2022 and top it up with a 6.1 per cent growth in the coming year (2023). This puts it ahead of both the global output and the emerging market and developing economies group. The latter is likely to clock a growth of 3.7 per cent in both the years. As for the global output, it is likely to fare similarly at 3.2 per cent (2022) and 2.7 per cent (2023).

This respectable growth has taken place despite the trauma that countries across the world have been subjected to as a result of the war in the Ukraine which has sent global energy prices sky high. But India has been fortunate to have adequate coal reserves and also been able to keep a pipeline open for energy imports from Russia.

Against this overall satisfactory performance, the economy and its managers have fallen down on the inflation front. The year began with retail inflation at 6 per cent, which was at the borderline of the Reserve Bank of India's comfort level. Thereafter came the Ukraine war and retail inflation hit an eight-year high in April.

In this connection, the inflation management by the RBI, whose foremost job it is to rein in runaway prices, has been faulted. It did not act till May when it decided to hike the policy rate which would raise interest rates across the board and curb money supply so that too much money did not chase the given basket of goods.

The most obvious and immediate fallout of the high inflation fuelled by rising crude oil prices was a drain on the country’s foreign exchange reserves and a downward pressure on the rupee's exchange rate vis-à-vis the US dollar. It began the year at around Rs 75 to a dollar and critically breached the Rs 80 mark and is now at above Rs 82.

With the rupee depreciating, the outgo on imports has gone up and, simultaneously, the inflow from exports has lost pace. This has led to a drawing down of the country’s foreign exchange reserves. These have gone down from around $640 billion to just over $560 billion. Within this general decline, the reserves have, in fact, lately improved, having touched the year’s low at $520 billion around early November.

The recovery in reserves has also been accompanied by a downward turn in inflation which has now gone below the RBI’s 6 per cent tolerance level. However, the central bank is not yet at the end of its monetary tightening. This has meant a rise in interest rates offered by financial institutions across the board, raising the cost of money needed by business.

But if money continues to be dear for too long, it will affect business costs and sentiment. The name of the game for the central bank is to rein in inflation but to ease up as soon as it finds that the economy is headed for recession — poor or negative growth.

One consequence of the buffeting that the global economy has been receiving through most of the year, which has affected India also, is that the employment picture has somewhat deteriorated. Since the Ukraine war began, the unemployment rate has actually been on a downward trend. But this is because seeing the poor condition of the job market, many have not offered themselves for work.

The unemployment rate indicates the proportion of those who want to work but cannot find work. Since October, when the economy has been going back to normal, the unemployment rate has gone up, indicating that many feel confident enough to go and look for work.

There is also a deeper underlying layer of reality on the employment front which is disturbing. Too few youngsters are working, thus being prevented from contributing to economic growth. This is resulting in a joblessness among them that is worrying. Critically, this is preventing India from reaping a part of the demographic dividend which comes a country's way if it has a young population which well outnumbers the aged who have stopped working.

The value that the young add to the economy is then greater than what is loses from superannuation and thus helps it grow fast. India is, in fact, behind both the developed economies and its neighbours in the proportion of young people able to find work. The demographic dividend available to India is also tapering off as the fertility rate is falling and the addition to the population from new young arrivals is diminishing.

According to World Bank data, in North America, half the population in the 15-24 age group, the years when youngsters typically get to work, is working. Organisation for Economic Cooperation and Development (OECD) countries, including the US and the UK, log 42 per cent and the European Union 33 per cent. For India, the figure is far below at 23 per cent. Even India's neighbouring developing countries fare better, with Pakistan at 39 per cent and Bangladesh at 35 per cent.

Thus overall, 2022 has seen the economy performing none too poorly, though there are dark spots which need to be addressed. If this is done successfully, the level of economic activity seems set to rise and take along with it the GDP growth rate.