Vijay Kumar Gaba

 State of the economy

The National Statistical Office (NSO) recently issued the first advance estimates (FAE) of GDP for FY22. This event is considered important, because these estimates are essentially used as input for preparing budget estimates for the next year (in this case FY23). The estimates are derived by extrapolating the previous year (in this case FY21) final estimates using the performance of sector indices in the first 7 to 9 months of the current financial year. These estimates may be subject to substantial revision in case of a material event that may impact the economic performance during the fourth quarter of the current financial year, e.g., lockdown during March of FY20.

FY22e Real GDP to grow 9.2%

NSO has estimated FY22 GDP to grow at 9.2% (-7.3% in FY21), lower than the recent estimates of RBI (9.5%).

Although the FAE accounts for slower growth (~5.6%) in 2HFY22 against 13.7% in 1HFY22, these estimates may not have fully factored in the impact of recent surge in cases of Covid and consequent mobility restrictions. Thus, there is a risk that the actual GDP might be slightly lower than FAE.

The GVA (GDP + subsidies on products – taxes) growth is expected to be 8.6%. This implies that NSO has factored in continuing buoyancy in tax collections in 4QFY22 also.

Most of the higher growth rate in FY22 could be attributed to the low base. As per the FAE, the real GDP for FY22 could be just 1.3% higher than the real GDP for FY20, implying less than 0.7% CAGR for 2years (FY21 and FY22).

Elevated inflation to reflect in higher nominal GDP growth

Elevated price pressures are expected to reflect in higher nominal GDP growth, which is expected to be 17.6% in FY22 (-3% in FY21). It is noteworthy that price pressure has remained elevated in FY22 across goods (food, fuel and others) and services.

 Private consumption continue to be sluggish

NSO has estimated private consumption expenditure to grow at a sluggish rate of 6.9% in FY22. This implies that the private consumption in FY22 will remain ~3% below the pre pandemic level (FY20). At 54.8% of GDP, the share of private consumption in real GDP is expected to be lowest in 8 years.

Besides, the key GDP component of Trade, Hotels, Transport and Communication is also expected to remain ~9% below the pre pandemic level (FY20).

It is pertinent to note that higher inflation of FY22 has so far not resulted in significant monetary tightening. Though the benchmark yields have seen significant rise in FY22 (from 6.05% in March 2021 to 6.6% presently), it has so far not reflected in lending rates. For example, SBI MCLR has remained unchanged during FY22 for most tenure.

Government consumption also to slow down

The consumption demand in the economy has been mostly driven by government consumption in crisis time. In FY22 government consumption expense is expected to slow down to 11.6% of real GDP from 11.7% in FY21; though it shall remain higher than 10.6% seen in FY20.

In absolute terms, government consumption is expected to grow 7.5% (at fixed prices) over FY21 and 15% in nominal terms.

Investment growth healthy

Investments are projected to grow at a healthy pace in FY22. NSO expects investments to be 29.6% of FY22 estimated nominal GDP, which is the highest level since FY15. In FY22, investment (Gross Fixed Capital Formation or GFCF) is seen growing 29%. It is also expected to be 18% more than in FY20

Economy expected to grow faster in 2HFY22

NSO expects over half of the projected growth in agriculture, industry and services to come through in 2HFY22. Considering the current state of pandemic led mobility restrictions, these estimates may have some downside risk.

For example, NSO estimates factor in 60% of the projected annual growth in the hospitality sector to materialize in 2HFY22. Clearly this forecast is at risk.

Similarly, 58% of the over agriculture output is expected to materialize in 2HFY22. Considering the inclement weather conditions across North and East India, this estimate may be at some risk.

External risk could rise

Though the balance of payment remained in surplus during 2QFY22, the external risks could rise if exports fail to pick up materially in FY23.

In FY22, BoP has been supported by a capital account surplus of US$40bn (5.3% of GDP) led by higher SDR allocation by the IMF; increased FPI debt inflows; FDI inflows, external borrowings and NRI deposits. However both FDI and FPI inflows have slowed down in recent months.

As per various estimates, a wider trade deficit ($190bn FY22e and $200bn FY23e) is expected to lead the current account deficit to 1.7% in FY22. Kotak Equity Research expects CAD to be 1.7% of GDP, and cautions that for every US$10/bbl increase in average crude price, CAD may increase by US$17 bn (0.5% of GDP). These estimates also assume inclusion of India in global bond indices and consequent $25bn debt inflows. Failing which, the pressure on INR may increase forcing RBI to intervene more aggressively.

Fiscal deficit contained

The government has been to contain the fiscal deficit in April-November 2021 period with the help of lower revenue expenditure, higher tax collections and dividends, and spectrum receipts. However, the disinvestment receipts are significantly lower than the budget estimates.

The lower fiscal deficit allows some leverage to the government to increase investment and consumption expenditure in the last quarter to support demand during the current phase of pandemic restrictions. If this is the case, the yields may continue to stay elevated and pressure on INR will sustain.

Conclusion

Though the Indian economy has recovered well from the shock of pandemic, the recovery is not broad based and continues to be fragile. On the supply side, the two key drivers of growth, i.e., manufacturing and exports continue to lag; whereas on the demand side private consumption continues to be vulnerable. This makes the policy making function rather challenging. Continued supply side constraints may keep the pressure on prices high; tightening the hands of RBI. A rate hike on the other side may hit the already sluggish demand even harder.

FY23 could be a struggle to attain balance between these counter pressures. Obviously the government will have a larger role to play in this and fiscal policy will become more relevant than monetary policy.

Last week, I mentioned that unemployment in India is a multidimensional problem and it would require a multipronged strategy. The traditional “industrialization” strategy may not yield much significant results in the modern Indian context as the industries are now mostly capital and technology intensive and offer significantly lower opportunities for unskilled and semi-skilled workers, which form a large part of the Indian workforce. Implementing the traditional Keynesian model of creating employment through public spending is also challenging due to stressed fiscal conditions, focus on privatization of public enterprises, and diminishing labour intensity of construction activity.

In the past fifteen years MNREGA (Rural capacity building) and PMGSY (Rural roads to improve accessibility) have been extremely successful in generating rural employment. These two schemes have not only supported the rural economy during the period of stress, but also created much useful capacities in the rural areas. Especially, the connectivity provided through roads built under PMGSY has been transformative for the economy of numerous villages in hinterlands and remote hills. However, these jobs are mostly seasonal and meant for unskilled rural labour. Their productivity and sustainability has been questioned by various studies.

Surfing through social media for a couple of hours, one could easily find out how the youth of our country are dissipating themselves in frivolous activities. It is therefore imperative that more productive and sustainable solutions are found to solve the unemployment problem of the country.

I would like to make the following three suggestions for improving the employment situation in India. Admittedly, these are random thoughts based on my personal explorations and understanding of India’s socio-economic milieu. In a typical bureaucratic manner, these ideas could be rejected as impractical or even flimsy. Else, these could be evaluated as starting points for developing something useful.

1.  Bring factories to farms

The employment elasticity of growth in manufacturing, agriculture and construction sectors has been decreasing consistently. This trend shall only accelerate in future. Most of the growth shall come from higher productivity through automation, innovation and consolidation. Elimination of redundancies and economies of scale shall lead the growth effort. The number of jobs, especially unskilled and low skill jobs shall remain limited.

Implementation of a common GST, nationwide agriculture market, ecommerce, automation (AI) etc., is leading to business consolidation in a major way. This may also potentially eliminate millions of unskilled and low skill jobs in the next decades or so.

The historical transition of farm workers to industry during the developing stage of growth may not work in the current Indian context. The so-called developed economies have transited the labour from farm to factories, when industry and mining were still labour intensive and global competition was not much. The productivity gains were immediate and tangible. It is no longer the case. The industry in India is already capital intensive. Even traditional labour intensive industries like gems & jewellery, textile, leather, mining and construction are becoming increasingly automated to stay viable against the global competition.

The ambitious Make in India program mostly aims to substitute imports. We are trying to compete with manufacturing powerhouses like China, Vietnam, Taiwan, etc. This defies the basic principle of making economic decisions, viz., everyone should do what they can do best to optimize the resource utilization.

Emulating China model may not work in India, as our political and economic model is entirely different. Moreover, the skill and training requirements for modern industry do not allow a straight farm to factory transition. So the options get limited to unskilled construction sector jobs and building industry around farms where the skill of the farmers could be suitable employed.

While MNREGA and the ambitious rural road program is taking care of unskilled construction jobs, there is little effort to take factories to farms. Encourage industry to partner with farm cooperatives to set up food processing units at the farms. The farmers' cooperative allots land and provides farm produce, whereas the entrepreneurs contribute capital and undertake marketing and sales responsibilities. Both share the profit in pre-agreed ratio. This should maximize profit of both the industrial enterprise as well farmers, and create ample employment opportunities close to villages.

Allow corporates to develop waste and barren land for farming purposes. For example, many corporates from India and the Arab world may be interested in developing Rajasthan and Gujarat desert and barren lands for growing dates, palm, aloe etc.

2.  Initiate public sector agriculture

Since independence the government has focused on development of industrial infrastructure in the country. It has actively participated in the endeavor through a large number of public sector enterprises; besides offering a myriad tax and other concessions to the private entrepreneurs. Now, the country has a reasonably strong industrial base. Many of our industries are globally competitive. We have a strong set of entrepreneurs and risk takers. It is therefore high time when the government should reset its priorities and turn its primary focus on agriculture. To meet this end, the government may consider:

·         Exiting all industrial and banking activities and actively undertake agricultural activities. It should develop barren lands; develop water bodies and irrigation facilities; develop and use technology for enhancing productivity; give employment to landless farmers; take risk with new technologies & crops; partner with marginal farmers in consolidating their land and do farming on that land - just the way it undertook industrial activities immediately after independence.

·         Undertake, on mission basis, the task to re-skill the underemployed farmers and farm labor. The farmers and their family members may be trained as dairy workers, domestic help, nurses, tourist guides, artisans, etc. Expecting the construction sector to absorb all surplus farm labor is a bad idea.

·         Develop at least 5 very large special agri export zones in rocky and desert areas of central and western India and undertake export of farm produce as a commercial activity. These zones may be developed in public, private or joint sectors. Besides, it may acquire farm assets, especially rice farms, overseas to reduce water intensity of Indian agriculture.

·         Encourage various states to make bilateral or multilateral agreements for procurement, processing and trading of farm produce and movement of labor within states.

·         Nationalize all rivers. Develop a national water grid. Set up a national water regulator, who shall work out a water sharing formula for all states and union territories every three year and maintain adequate provisions for managing droughts. The idea should be to ensure that not a drop of river water flows into sea from India. Develop a water distribution grid on the models of roads and power grids on a mission basis.

It has taken seven decades for Indian industries to reach a stage where the government may consider fully exiting the industrial activities. It may take 2-3 decades for Indian agriculture to reach a stage where the government will be able to exit farming activities completely.

Please note that I am also not suggesting nationalization of the agriculture sector. I am just saying that the government should undertake the activity on a commercial basis to provide the sector with much needed escape velocity in terms of capital, technology, and risk taking capability.

3.  Engage youth in nation building

The government must on priority prepare a comprehensive strategy for engaging youth in the nation development endeavor. A nationwide MNREGA type scheme may be launched for youth, whereby they could be engaged in socially useful productive work (SUPW). Millions of jobs like traffic management, night patrolling in areas susceptible to crime against women, enforcement of cleanliness of public areas, old age care, social forestry, teaching & skilling to unschooled, etc. could be assigned to the youth not having a regular job. This shall help in developing a sense of nationalism, belongingness, and responsibility amongst youth, besides keeping them occupied in productive jobs rather than leaving them on their own to waste time or take to the path of crime and unlawful activities.

Also read

Five shades of unemployment

Unemployment – misdirected policies

Few random thoughts on unemployment in India

 As I mentioned yesterday (see here), unemployment in India is a multidimensional problem. Unemployability (skill deficit), underemployment, disguised unemployment, gender disparity, regional disparities, are some of the contours that define the state of unemployment in India. The genesis of the reasons responsible may be traced to traditions, education system, colonial legacy, economic policies, and demographics. Obviously, the solution for a multidimensional problem also needs to be multidimensional. The classical solution, i.e., industrialization alone is definitely inadequate for managing the complex unemployment situation in India.

Employment framework in India

As per 6^th Economics Census (2013), there were 58.5mn business establishments (excluding public administration, crop production & plantation, defense and compulsory social service activities) operating in the country. Of these ~96% establishments were privately owned while just ~4% were government owned. These establishments employed 131.29mn people (52% in rural areas and 48% in urban areas).

·         About 60% of business establishments were in rural areas while about 40% operated in urban areas. Out of these, about 78% establishments were engaged in non-agriculture activities, while ~22% were engaged in agriculture related activities (excluding crop production and plantation).

·         During the 8yr period between 2005-2013, the business establishments grew by ~42% from ~41mn to ~58mn. In this period agriculture establishment grew ~116% while non-agriculture establishment grew ~29%.

·         Out of total ~58mn establishments about ~72% were Own Account establishments (meaning with no hired worker). These Self Owned Establishments (SOEs) grew 56% during 2005-2013. About 63mn people (48% of total employed people) are employed in these SOEs.

·         About 96% of establishments had less than 5 workers. Another 3% have 6-9 people employed.

·         The government or public sector employed only 7% of the people. 79% people worked in proprietary establishments. Organized private and cooperative sector employed only 14% people.

·         About 36% of business establishments were operated from the home of the Self Owner, while another ~18% were operated from outside the home without any fixed structure.

·         Livestock accounted for ~87% of the agriculture activity.

·         Retail trade (~35%) and Manufacturing (~23%) were dominant non-agricultural activities.

·         Out of 1.87mn handicraft/handloom establishments, employing 4.2mn people, 79% were family affairs without any hired worker.

From this data, I decipher that—

(a)   About 96% establishments have less than 5 workers. Another 3% have 6-9 people employed. Only three states - Tamil Nadu (13.81%), West Bengal (11.07%) and Maharashtra (10.02%) have more than 10% establishments with 10 or more workers.

Most of the legislations relating to employment and social security provisions (ESI, EPF, Gratuity, Bonus etc.) apply only to the establishments with 10 or more hired workers. Implying that only ~1% of the total private workforce is eligible for statutory social security benefits. Even the new labour code (The Code of Social Security, 2020 that would subsume most of existing laws) covers only the establishments with 10 or more workers.

(b)   Livestock accounts for 87% of the agri sector related establishments. The whole of it cannot be dairy farming. Obviously, meat (including bovine meat) is a big business in terms of employment.

(c)    Out of 1.87mn handicraft/handloom establishments, employing 4.2mn people, 79% were family affairs without any hired worker.

From my experience I know for sure that a large number of these establishments employ household children as workers. In my knowledge none of the legislative provision or policies designed to prevent child labour and promote child safety and security deals adequately with a parent employing his child for his business, as the child is not a hired worker in this case.

The worst part is that if the parent business is impacted due to any adversity, the children are affected most, as they are mostly unemployable in other businesses.

(d)   About 36% of business establishments were operated from the home of the Self Owner, while another ~18% are operated from outside the home without any fixed structure.

From my experience I know that most of these business establishments may not exactly be "authorized" from civic and town planning view points. This creates a number of problems from everyone. Grocery and other daily need shops operating from homes; tailoring shops; automobile repair shops create nuisance for the neighborhood; pose environment and safety hazard; put pressure on civic amenities like power, water and sanitation; motivate corruption; and above all lead to serious problem of child labor, underemployment and disguised unemployment. Town planners, civic administrations, and government often fail to recognize & accept this phenomenon and therefore are unable to find acceptable solutions.

(e)    Retail trade (~35%) and Manufacturing (~23%) are dominant non-agricultural activities in the country.

Organized retail and automation in manufacturing are a potent threat to these traditional sources of employment to traditionally skilled and semi-skilled workers. The redundant traditionally skilled and semi-skilled workers would obviously be competing with the unskilled labour in construction and “gig work” space, leading to massive underemployment, mis-employment and unemployment.

Some more on this on Tuesday.

Trivia

Regardless of the government data, the telecom sector may have created most of the incremental employment opportunities in India in the past two decades. From Gangotri to Kanyakumari and From Tawang to Kutch, wherever you go, it is common to find small shops selling telecom products (prepaid cards, mobile phones and accessories) and phone repair services. Telecom is also at the core of the entire new economy and startup ecosystem. However, unlike the traditional employment provider textile, the government has never promoted the telecom sector. To the contrary, efforts have been made to weaken the sector.

Shade 1

Subhash Pandey (45yrs commerce graduate) was working as an account assistant at a small shoe factory in Kanpur when the nationwide lockdown was imposed in March 2020. He lives in a rented house, and has two daughters aged 12yr and 9yr. Jyoti, his wife (39yrs, political science graduate) undertakes tailoring assignments from a local boutique to help in meeting household expenses. Post lockdown, Subhash lost his job, and tailoring assignments for Jyoti have also reduced. The expenses on education of the daughters have risen; and kitchen expenses have also gone up due to food inflation. Subhash now works as a delivery agent for online retailers and food delivery services. He gets Rs7-10 per delivery he makes. He needs to make at least 80-100 deliveries per day to earn (net of fuel expenses) what he was earning before lockdown. Jyoti is now working 8hrs (against the earlier 4-5hr) doing miscellaneous jobs (tailoring, pickle making, packaging etc.) to earn the same amount. Their savings have mostly evaporated.

Shade 2

Rajiv Saxena, earned his Bachelor of Arts degree from CCS University (Merrut, UP) in 2020. He unsuccessfully searched for a job in Merrut for one year. He came to Delhi in 2021 and worked as a “gig worker” for six months. The money he earned was insufficient to meet his rent and food expenses. He decided to return home on Diwali and felt depressed. His father, a retired Army man, drew from his savings and converted the street facing room of their two room house into a small dailies shop, and constructed an additional room on the roof. Rajiv now sells eggs, bread, milk and toffees to the people living in his street. He competes with 2 more similar shops and 9 online suppliers. In the past two months he has earned Rs700 (before paying the electricity bill for his shop). The shop keeps him busy for 2-3hrs in a day. He spends the rest of his time watching “stuff” on his phone. His mother is worrying about his marriage already.

Shade 3

Om Pal Yadav (46yr, matriculate) is a marginal farmer in Shahjahanpur district of UP. He owns 10 bigha land (~1.5acre) and does sustenance farming, i.e., grows wheat, pulses, millets for self-consumption. His wife 42yrs and two sons (22yrs and 19yrs) help him in farming. In his spare time Om Pal works as gardener in some houses in Bareilly, 55kms away from his village. His son also undertakes MNREGA jobs in his village. The wages pay for their non-food expenses. They have no savings; a semi pucca house and no private transport. They are expecting to get a motorcycle in dowry when the elder son gets married later this year. Last year, their total family earnings were Rs1,88,000 (including the market value of their farm produce). If all three male members had worked in industry or construction, the minimum wage they would have earned is 2.5x their present earnings.

Shade 4

Vivek Gupta (38yrs IIT, IIM), worked with a multinational investment bank for 7yrs, before he decided to take the plunge and join a B2B startup as partner in 2016. His wife Ritika (37yr MBA), also a banker, fully supported him. His father, a retired civil servant, was initially against the idea but supported him nonetheless. After 5yrs, the startup has burned more than US$7.5mn in cash and has reached the end of the road. Vivek is broke – financially, psychologically and emotionally. Ritika is not able to take it anymore. She wanted to start a family, but it was getting too late. She has filed for divorce. Vivek also lost his father to Covid in 2020. There are some debts to repay. His friends are trying to find him a job, but things are really tough. The best offer so far is 75% lower than what he drew as his last salary in 2016.

Shade 5

Aditi Shekhar, (29yrs, CA, CS, Coimbatore) was happy being married to Rajashekhar who managed his own ready to eat snacks factory. The business is doing well. After their marriage in 2017, she attended the family business for a few months. The option of her working for someone else was never discussed. However, after the birth of their son in 2019, she has become a fulltime housewife. The decision of her non-working was not discussed within the family. It was simply assumed that she does not need to work now as her domestic responsibilities have increased. Unsurprisingly, the state of affairs does not seem to be bothering Aditi even a bit. She is happy managing the kitchen and raising the kid. Of course she is not alone; there are millions of professionally qualified women who have accorded higher priority to household responsibilities over pursuing a professional career. Not all of them may have chosen house over office voluntarily. Many of them may be unhappy, frustrated and feeling wasted.

Unemployment is one of the most pressing problems that the Indian economy is facing. As per latest data published by Center for Monitoring Indian Economy (CMIE), “India's unemployment rate reached a four-month high of 7.91% in December as compared to 7% and 7.75 per cent in November and October 2021”.

As per CMIE, the urban unemployment rate is now 9.30% while rural employment is 7.28%. Both urban and rural unemployment saw significant rise from 8.21% and 6.44%, respectively, in the previous month.

The government spokespersons have vehemently rejected these figures arguing that the government schemes have resulted in better self-employment opportunities; farmers’ income has increased materially and public sector hiring is improving. The massive infrastructure building thrust of the government is creating a significant number of new jobs. The production linked incentive schemes, incentives to startups etc. are creating new job opportunities in the private sector also. Often the EPFO data is cited to showcase improving employment conditions in the country.

During my recent visits to UP, Punjab and Uttarakhand I did not find much evidence that would support the government contentions. Moreover, the debate on unemployment is ignoring the serious problem of unemployability, underemployment, and disguised unemployment that are rising even faster than the “unemployment”, as defined by the official agencies. The lower woman participation rate must be a serious policy concern; but we are yet to see a concerted policy action on this.

Some more thoughts on this tomorrow.

 योगस्थ: कुरु कर्माणि सङ्गं त्यक्त्वा धनञ्जय |

सिद्ध्यसिद्ध्यो: समो भूत्वा समत्वं योग उच्यते ||2:48||

Be steadfast in the performance of your duty, O Arjun, abandoning attachment to success and failure. Such equanimity is called Yog. (Srimad Bhagavad Gita, Chapter 2 Verse 48)

One who prudently practices the science of work without attachment can get rid of both good and bad reactions in this life itself. Therefore, strive for Yog, which is the art of working skillfully (in proper consciousness). (Srimad Bhagavad Gita, Chapter 2 Verse 50)

In the present times, ‘politics’ is a struggle to find balance between economics and popularity.

Good economics (fiscal prudence; balanced monetary policy; equitable taxation; etc.) usually does not get popular votes. Whereas poor economics (subsidies; helicopter money; unsustainable incentives like tax concessions, lower rates, subprime credit; etc.) may get popular votes in the near term, but it creates enough problems (inflation, unemployment, lower growth etc.) for the people as well as politician in power over mid to long term.

Unfortunately, most modern day politicians show a natural bias towards popularity over economics as it helps them in gaining and retaining power. Recent visits to three states going to elections in the next couple of months has shown that Indian politicians are no exception to this general rule.

Politicians from all parties are promising a variety of freebies to lure the voters. Free electricity and direct cash in the bank accounts of adult women are two most popular promises. Aam Aadmi Party (AAP), which is governing Delhi presently, is showcasing the Delhi model of governance (free electricity and improvement in public education) in these states and gaining support. In fact it is emerging as the main contender in Punjab and a strong challenger in Uttarakhand. The principal opposition in UP (Samajwadi Party) and Uttarakhand (Congress) have certainly taken a few leaves out of theAAP book. In UP and Uttarakhand, the ruling BJP is apparently seeking votes on the issues of good governance and development. However, on the ground, emphasis on subsidies, freebies and revival of Hindu nationalism is conspicuous.

My interactions with people in these states indicate that no party in Uttarakhand and Punjab may get a decisive mandate; though Congress seems to have a marginal edge in Punjab. In UP BJP may retain power with a clear majority, though its tally may be much lower than 2017 elections. If I may summarize the input received from various media reports, opinion polls and other sources, the other two states, i.e., Goa and Manipur, may also see an indecisive mandate.

In all the states, religion and caste remain key considerations for most political parties. In UP and Uttarakhand, predominantly Hindu states, all parties are vying with each other to prove themselves more Hindu than the others. The constitutional mandate of “secularism”, that used to be a key theme of non BJP parties in previous elections, is conspicuous by its absence from the main narrative.

Unsurprisingly, however, none of the parties seems to be concerning itself with the teachings of Hindu scriptures. For example, the above cited two verses of Srimad Bhagavad Gita, propound some quintessential qualities for the leaders (or politicians in modern context), viz., steadfastness in pursuit of righteous duty, equanimity, equipoise, and detachment.

The Lord says perform your righteous duties without bothering about success or failure; without attaching yourself with the results. Listening to what Lord says, the politicians today must be pursuing Good economics – adopt policies which would bring the prices down, create productive employment, make taxation equitable, and make growth inclusive and sustainable, even if pursuit of these policies does not fetch enough votes.

It is not that various governments have always ignored this guidance and pursued only poor economics. But they have definitely always shown a bias towards poor economics. Usually, the governments resorted to good economics only when it was inevitable, i.e., when the economy faced a serious crisis, e.g., Congress in early 1990s and NDA in late 1990s and early 2000s.

Obviously, the economic policy has been mostly driven by the political ambitions of the party in power, rather than the steadfastness and righteousness.

Of course, many would argue that this is not true about the incumbent government at center. I would certainly like to hear the arguments to find if there is any material difference.

 Manulife Investment Management – Disruptive tightening and China key risks

Monetary policy—Global central banks are sounding more hawkish—U-turns from the Bank of England (BoE), policy adjustments from the European Central Bank (ECB), a Bank of Canada (BoC) that’s actively tapering, and a U.S. Federal Reserve (Fed) that’s set on winding down its asset purchase program. While our base-case expectation is that the market will be able to absorb these tightening measures if they’re implemented gradually, it’s still worth noting that:

• Global liquidity is declining, which has historically been problematic for growth

• If real interest rates climb too quickly, it can derail the equities market (as it traditionally has done), particularly as rates approach 0%

• The current environment creates scope for policy miscommunication that could create volatility in global interest rates and currency markets

The downside risks in the coming quarter are most concentrated in China, where the delayed effects of policy tightening (credit, monetary, fiscal, regulatory) are likely to continue to weigh on growth, perhaps a little more than expected or had been intended. We also expect broader regulatory clampdowns to persist through 2022. Unsurprisingly, investor sentiment toward China remains negative.

Crucially, we believe China isn’t well positioned to tackle risks associated with a stagflationary environment. Chinese macro dynamics will continue to be an important market driver in the months ahead, although it’s perhaps fair to say that investors have a better read of the situation now than they did in early 2021.

Invesco – 2022: A year of normalization

Expect global growth to normalize, remaining above its long-term trend but decelerating to a more sustainable rate as fiscal stimulus is gradually removed. We anticipate that inflation will peak in mid-2022 and then start to slowly moderate, backing down toward target rates by the end of 2023 as supply chain issues resolve, vaccination levels increase, and more employees return to the workforce. We look for the Federal Reserve (Fed) to remain patiently accommodative, with a rate lift-off in the back half of 2022, although other developed countries’ central banks might act more quickly. Finally, we expect volatility will increase as markets digest the transition to slower growth and a gradual tightening in monetary policy.

Bank of America – Markets to peak in 1Q2022

Global liquidity – the key predictive driver of global equity markets since the Global Financial Crisis – is on course for a peak out around March 2022. G-4 central banks’ balance sheets to expand by another USD750bn by that time (from USD30.7trnow to USD31.4trin Mar-22) and then peak out. Markets are likely to reach a high around the same time and then meander around aimlessly, probably with a downward bias as the earnings cycle in China surprises very negatively and the USD remains strong. Measure of global free liquidity – the gap between G-7 M2 and nominal economic growth – suggests a similar timeline.

The earnings cycle in many Asian/EM countries reliant on the Chinese economic cycle might also disappoint – unless, of course, we see a substantial credit easing in China soon, which does not seem to be likely.

Morgan Stanley – Normalization but not back to normal

Strong global inflation for now, but receding next year.

Global GDP to reach the pre Covid path by end 2022

EM central banks started tightening in 2021, DM central bankers to follow in 2022.

Nomura - Supply constraints to morph into an export-led demand downturn in Asia

The emergence of the Omicron variant has increased uncertainty, but we see Asia’s bumpy upcycle extending into early 2022. Our bigger worry is demand. We expect an export growth downturn to begin from mid-2022 and are more circumspect on the rotation into domestic demand.

The inflation rate will likely edge higher, but the underlying theme will remain one of benign inflationary pressures and gradualism on monetary policy normalisation. Alongside an export downturn, high debt and scarring effects, we see lower terminal policy rates in this cycle.

China: We expect economic growth to slow sharply to a below-consensus 2.9% y-o-y in Q1 2022 and 3.8% in Q2, before Beijing’s pain threshold is triggered.

India: Higher CPI inflation will trigger faster policy normalisation (100bp, even as scarring effects weigh on growth starting from mid-2022.

Korea: Japanification risks are rising. We expect growth to disappoint, the BOK’s rate hiking cycle to end in January and two rate cuts to ensue in 2023.

ING Bank – Another difficult winter for Eurozone

Even before the appearance of the Omicron variant, the number of Covid-19 infections in the eurozone was rising rapidly, pushing several member states to reintroduce containment measures, with Austria even returning into full lockdown. As we expect more countries to tighten measures, growth is likely to slow significantly in 4Q and 1Q 2022, with a negative growth figure in one quarter not impossible. But on the back of booster shots and antiviral drugs, a strong recovery might follow, potentially leading to 3.8% growth in 2022.

Inflation is expected to drop below 2% towards the end of 2022, with the average for the entire year staying above the ECB’s target. As the medium-term inflation outlook has become more uncertain, the ECB is likely to be more cautious in its forward guidance. The Pandemic Emergency Purchase Programme will end in March, but a small transitional programme could be introduced to smooth the tapering process. We now see a first rate hike at the end of the first quarter of 2023.

UBS – Discovering the new normal

Financial markets face a Year of Discovery, as we find out what “normal” rates of growth and inflation look like, and how economic policy responds, after two years dominated by the effects of the pandemic. It will be a Year of Discovery for many individuals, too, as we rediscover lost pleasures while considering the enduring impact of the pandemic on our lives, goals, and values. The year ahead presents an opportunity to align your portfolio with the key trends impacting our world, and with what matters most to you.

We expect currently elevated rates of inflation to subside over the course of 2022, as supply-demand mismatches resolve, energy prices stabilize, and labor market frictions ease. This should be supportive of equities, by alleviating risks to corporate margins and reducing the likelihood that interest rates will need to be  hiked quickly. Nonetheless, the process of discovery of a new balance between supply and demand will create uncertainty that investors will need to navigate.

World economic growth may remain well above trend in the first half of 2022, followed by normalization in the second half, as reopening completes, excess savings are spent, and emergency stimulus measures are withdrawn.

We start the year with a positive stance on equities, and particularly the winners from global growth, including Eurozone stocks, though slower growth over the course of 2022 should also start to favor healthcare, a defensive sector. Low rates, yields, and spreads speak in favor of a continued hunt for “unconventional” yield. We also have a positive stance on the US dollar. Looking longer-term, we see opportunity in disruptive technologies—artificial intelligence (AI), big data, and cybersecurity—and in investments related to the net-zero carbon transition.

The latest macro data indicates that the Indian economy may be standing at an inflection point. Having survived a major accident in the form of Covid19 pandemic, the economy looks stable, having progressed well to reach closer to the pre Covid level of activity. Of course, for next few quarters the economy may still need to use the support of government spending, before the virtuous cycle of higher investment and consumption kick starts.

Post pandemic, the challenges before the government are multifold; and so are the opportunities. A successful resolution of these challenges could trigger a virtuous cycle of growth and catapult the economy to the higher orbit. A failure may not be an option, as it could cause a disaster of unfathomable proportion.

Besides, merely achieving a full ‘V’ recovery to the pre pandemic level of economic activity will be inadequate, since pre pandemic the economy was slowing for many years and was completely unable to generate adequate jobs for the burgeoning youth population. The government will need to apply multiple accelerators for the sustainable growth to reach to the target of 8% plus.

The pandemic has widened the divide in the society, as the recovery so far has been rather ‘K’ shaped. Income and wealth inequalities have widened. Disparities in access to digital infrastructure have amplified the divide in social sectors like healthcare and education. The gap between organized and unorganized sectors has enlarged materially. To maintain harmony and peace in the society, these gulfs would need to be managed.

As per a study done by the Azim Premji University scholars, “one year of Covid-19 pandemic has pushed 230 million people into poverty with a 15 per cent increase in poverty rate in rural India and a 20 per cent surge in urban India."

CMIE data showed that “the unemployment rate has gone up as high as 12 per cent in May 2021, 10 million jobs have been lost just on account of the second wave and 97 per cent of the households in the country have experienced declines in incomes”.

The labour force participation rate was at 40.22% in the period between May-August 2021, according to latest data by the CMIE. It has remained at about 40% since the start of the pandemic, compared to about 43% before it. This is the lowest the labour force participation rate has been since 2016, when data was first compiled.

Exports, one of the key growth drivers, have persistently failed to deliver in past one decade. There is no sign of any major improvement in exports, especially when the global growth has already plateaued after post pandemic push. Considering that India’s capex is closely related to exports and global trade, the probability of any material pick up in private capex appears slim.

Poor export growth and high petroleum and gold imports have resulted in sharp increase in trade deficit for India. Consequently, INR has come under pressure. USDINR is its weakest level now and looking even more vulnerable given its outperformance vs EM peers in past one year.

Persistent food and energy inflation is key concern, though other industrial input prices have shown signs of stabilizing. Given the poor wage growth for semi-skilled and unskilled workers, a large part of the population is reeling under the impact of stagflation, hurting the consumer sentiments. Consumption slowdown is one of the key economic concerns currently.

The best thing for Indian economy is that the government has sufficient fiscal leverage available to accelerate the investments. At Rs5.5bn the FY22e gross fiscal deficit is lower than the pre pandemic years. The April-October 2021 fiscal deficit is just ~36% of budget estimates. The government has thus gathered enough ammunition by adhering to higher duties on fuel and lower revenue spending to manage its fiscal balance. Buoyant revenue and aggressive disinvestment may help in improving it further.

The valuations of Indian equities, or the global equities in general, has become subject of intense debate, with participants analyzing the markets with personal biases and prejudices.

A variety of models, methods and timeframes are being used to justify the current valuations as reasonable, or reject these as unsustainably high. Many analysts have preferred to ignore the aggregate valuations and adopted different yardsticks for various classes of businesses.

Given that the benchmark Nifty has close to 38% weight of financial services, it may not be appropriate to give undue consideration to the aggregate PE ratio of the index for benchmarking the “market” valuation. Some analysts prefer to use global indices (e.g., MSCI India Index) to assess the valuations of Indian equities.

Many new age businesses which are solely focused on revenue growth and may not be profitable in short to mid-term. For these businesses applying the conventional valuation methods might not be appropriate.

Nonetheless for reference purposes, on conventional parameters, post the recent correction, the valuation of Indian equities may be marginally higher than the long term (10yr) averages, and do not appear to be a cause of significant concern.

However, midcap valuations relative to large cap is high; India PE premium over global PE is still quite high, and the risk premium (Equity yields vs Bond Yields) is very low. Therefore, the upside in short term may be limited.

 The Indian equities performed decently in 2021. Investors would normally have nothing to complain about the returns on their equity portfolios.

·         The benchmark Nifty is up ~21% YTD2021. It is 6^th consecutive year of positive return on Nifty. Nifty has now returned positive return in 9 out of past 10years (2012-2021).

·         Nifty has averaged 15881 (based on daily closings) in 2021, which is 44% higher than the same average for 2020. Based on change in average, this is best performance since 47% gain in 2006; implying strong returns for SIP investors.

·         For long term buy and hold investors, five year rolling CAGR in 2021 is ~15.7%, which is best performance since 2013. Five year absolute Nifty return in 2021 is ~107%, also highest since 2013.

·         The market returns were fairly broad based in 2021. Smallcap (~56% YTD2021) and Midcap (~44% YTD2021) have done significantly better than Nifty (~21% YTD2021). Broader market indices are now outperforming the benchmark Nifty on 3yr and 5yr basis. The household (retail) investors investing in diversified portfolio have also therefore recouped the underperformance of 2018-19.

·         Nifty has outperformed most of its emerging marker peers in 2021; and has performed in line with the top performing major global markets US and France.

…but some concerns emerging

In recent weeks however the market has given some cause for concern that have clouded outlook for the year 2022. Having quickly recovered all the losses from panic reaction to the pandemic, and moving about ~50% higher than the pre pandemic Nifty highs of ~12500, the Indian equity markets now appear tired and indecisive.

·         After topping ~18600 in October 2021, Nifty is not back to ~17000 level, where it was in August 2021. However, during this 3200 odd point up and down journey of Nifty, the actual outcome might be very different for various investors, depending upon their portfolio positioning and activity during this period. Considering that the daily volumes were highest around the peak level of October 2021, it is likely that some investors got greedy at the peak and invested larger amount in mid and small companies. They may have lost 10-25% of his latest installment of investments.

·         In 4Q2021, Nifty has averaged over 17800, against the current level of ~17000. A large proportion of stocks are trading below their technical key levels, e.g., 200DMA, indicating underlying weakness in markets.

·         The market breadth has been consistently negative since August 2021.

·         Indian markets have outperformed most of the global peers in past 20months. The global investors are now looking at the underperforming markets in search of better returns. Many global brokerages like Credit Suisse, Morgan Stanley, CLS, Goldman Sachs etc., have downgraded the weight of Indian equities in their portfolios to allocate more to China etc. The global flows to India may therefore slow down further. Foreign investors have been net sellers in secondary markets for past many weeks.

·         RBI has started to normalize the excess liquidity through variable rate reverse repo auctions of 14-day and 28-day. Currently, INR6tn/INR8.6tn excess liquidity is being absorbed through VRRR auctions. Going ahead, the RBI plans to increase the amount and tenor of absorptions through VRRR. This could impact the cost of borrowing for market participants and therefore impact the market sentiments.

·         Despite recent market correction, greed continues to dominate fear and household flows remain strong. The probability of a sharper correction in broader markets therefore remains decent.

 In its latest policy statement, RBI has reiterated its unwavering commitment to growth, ignoring the concerns about it missing the inflation curve. There are not many precedence in past two decades when the RBI has shown such unwavering commitment to growth despite mounting inflation concerns and global tightening pressures.

The decision of the Monetary Policy Committee of RBI to maintain status quo on policy rates and keep the policy stance “accommodative” despite mounting inflationary pressures has provided some relief to the financial markets. However, it has divided the experts on the mid-term economic impacts.

The bankers have generally welcomed the RBI’s policy stance as credit and growth supportive. However, economists believe that this leniency on inflation may not end well. They believe that this profligacy of RBI will leave it much behind the curve and force it to make disruptive tightening in mid-term.

There are some questions over the autonomy of MPC also. A small section of analysts believes that the government may have hijacked the MPC agenda, forcing it to ignore its primary mandate of price stability; and support the government through continuing monetary stimulus.

In my view, the monetary Policy Committee (MPC) and RBI have taken the most appropriate path by staying focus on growth.

There is no conclusive empirical evidence available to indicate that RBI has been able to influence prices through monetary policy. On the other hand, the monetary stimulus (lower rates and accommodative liquidity) has invariably shown positive results. This is particularly true in episodes of inflation with negative output gap, implying underutilization of capacities.

There are ample indications to suggest that RBI is working in close coordination with the government. Sharp cut in duties on transportation fuel 2 weeks ahead of MPC meet shows that the government is addressing the RBI concerns on prices.

RBI’s lower inflation forecast for next quarter, when the US Federal Reserve Chairman has indicated that the inflation may not be transitory as believed earlier and OPEC’s resolve to maintain prices around present levels, further indicates that RBI is comfortable with the government’s assurance to reign energy prices.

The latest Monetary Policy Statement of MPC also does not seem to concur with the US Fed assessment on inflation. It continues to believe that inflation is transitory and it will ease in next few months.

To summarize, RBI has made it clear that the monetary policy shall remain consistently growth supportive for next many quarters. It will wait for conclusive evidence on stabilization of growth trajectory before changing its policy stance. Any changes till then will be implemented by managing the liquidity through open market operations.

The governor highlighted in his press statement that “the Reserve Bank has maintained ample surplus liquidity in the banking system to nurture the nascent growth impulses and support a durable economic recovery. This has facilitated swifter and more complete monetary policy transmission and the orderly conduct of the market borrowing programme of the Government. The Reserve Bank will continue to manage liquidity in a manner that is conducive to entrenching the recovery and fostering macroeconomic and financial stability.”