Roadblocks remain on way to economic growth

The outcome of the third wave, yet in its initial stages, will unfold itself much later. But dealing with its impact on the economy immediately is becoming a major challenge for both the Central and state governments in 2022. It has already claimed its first casualty. The contact-intensive sectors that were poised for a resurgence are again facing a slump.

Volatile: Rising oil prices have added to inflationary pressures on the economy. PTI

Sushma Ramachandran

Senior Financial Journalist

THERE is no doubt that the economy will be facing a series of challenges in the months to come. The first has emerged already just as it seemed the country was moving out of the pandemic doldrums. A new Covid variant has stormed in with the potential to halt the fledgling recovery process. The prospect of a V-shaped recovery has diminished and only a K-shaped or uneven revival process is visible right now.

As Covid cases are rising all across the country, assurances are being given by experts that the new variant has milder symptoms and could have much lower hospitalisations and deaths than the earlier Delta one. But other experts are saying the prospect of many people, especially healthcare workers, falling sick at the same time, could cripple medical infrastructure. Cries for help are already emerging in the social media from doctors in the US who are battling the virus with truncated staff due to colleagues falling sick, albeit with mild symptoms. Caution is thus the need of the hour, but visuals from all across the country are showing heedless crowds in holiday season revel and also in markets.

The outcome of the third wave, yet in its initial stages, will unfold itself much later. But dealing with its impact on the economy immediately is becoming a major challenge for both the Central and state governments in 2022. It has already taken its first casualty. The contact-intensive sectors that were poised for resurgence in the past few months are again facing a slump. The restaurant and hotel industry that employs millions of workers has had to weather yet another setback. The aviation sector which had just come back to the pre-pandemic levels of passenger traffic is now likely to face curtailed take-offs. West Bengal has already cut back on flights from Mumbai and Delhi. The vast hospitality industry in the formal and informal sector is clearly facing a bleak future.

This brings one to the linked issue of unemployment that has been the worst aspect of the pandemic since March 2020. The jobs scenario was not looking bright even before the Covid virus hit these shores. It became a crisis after the lockdown last year. The latest data from the Centre for Monitoring Indian Economy (CMIE) shows the unemployment rate rose to a four month high of 7.9 per cent in December. On the plus side, rural areas have continued to show a better performance than urban segments in jobs data. But the quality of rural jobs continues to be poor as many more are relying on job schemes like MGNREGA. In other words, more jobs are available largely for unskilled labour, while the better quality jobs in urban areas have been declining, according to the CMIE.

The hard reality is that the bulk of employment in the country is in the informal sector. The migrant workers that were trudging back to their rural homes after the lockdown last year have not all returned to their jobs in urban areas. Many are simply not available any longer as establishments are hesitant to re-employ staff owing to the yo-yo situation resulting from the onset of the second wave. The jobs crisis is worsening right now. It does not help to avoid referring to it while commending the faster recovery in the formal sector. Prime Minister Narendra Modi, for instance, did not mention jobs while citing several key economic indicators recently to stress that things are now even better than the pre-pandemic times in many ways. But unless unemployment rates are brought down significantly, the pain of joblessness will continue to haunt those at the bottom of the pyramid.

There are external challenges as well in the coming year. The greatest concern is hardening of global oil prices. These had shot up in October last year to 86 dollars per barrel for the benchmark Brent crude, a level unsustainable for a country that imports over 80 per cent of its consumption. The market had shown a softening trend over the past month owing to Omicron fears. But this has now reversed due to reports of mild symptoms by those hit by the new variant, indicating it may not be too disruptive for the world economy.

The high oil prices in recent months have already affected the current account which has shifted from surplus to deficit in the second quarter (July to September). This was mainly due to the widening of the trade deficit to 44.4 billion dollars from 30.7 billion dollars in the preceding quarter. Widening of the deficit is not of immediate concern as it also reflects buoyancy in the economy due to rise in non-oil imports. But a continued spurt in the cost of oil imports will be problematic at a time when revenues need to be allocated for other key sectors such as vaccinations, investments in infrastructure and rural job schemes.

Rising world oil prices will also create further inflationary pressures at a time when the consumer price index is moving upwards. Inflation is yet another challenge to be tackled by policymakers. The large contribution of oil to rising prices will be difficult to manage as global oil markets are likely to remain volatile. The need to balance concerns over inflation with the need to promote growth is one of the dilemmas facing the country’s central bank. These are the same issues facing the banks of many other countries. Even in developed economies like the US, inflation has reached unprecedented levels and this is likely to spell the death knell for the easy liquidity policy of recent times.

There are certainly many positive economic indicators as the country moves into 2022. These include monthly GST collections sustaining at over Rs one lakh crore over a six month period and foreign exchange reserves reaching record levels. Exports are also surging and 10,000 start-ups emerged in the last six months. But these cannot wish away the other infirmities that can cause a lag in growth. A high unemployment rate, continuing slump in contact-intensive segments, rising oil prices and inflationary pressures are all factors that can put a dent in the efforts to revive the economy and improve the state of well-being of the masses.