The New year brings a season of cheer, even if cakes and credit are costlier than last year.
When 2022 began, we hoped to turn a corner, hot-footing Covid-19, low growth and high inflation. But it didn't quite pan out like that.
Globally, 2022 acquired a unique place in economic history for ending the decades-old era of low inflation and low-interest rates. Central banks found themselves on the bitter end of an inflation enemy hunt as their credibility plunged without a parachute for misreading price rise as transitory. The year will also go down in history for the unprecedented rise in policy rates, which many fear could end up as a butcher's knife on growth.
We aren't sure if the inflation monster is tightly tied back in the barn. Moreover, the rate hike monetary bonfire isn't over yet, which means, in 2023 they'll likely take us one step closer to the projected global recession.
So, as we draw the curtains, we cannot help but paraphrase the iconic Wodehouse-Jeeves exchange: "There are moments, Jeeves, when one asks oneself, "Do these predictions matter?"
"The mood will pass, sir."
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Growth
January 2022 brought with it the most-feared occurrence with the third Covid-19 wave hitting the country. Thankfully, the economic scarring was relatively lower than in the previous two bouts. But before we could catch our breaths, Russia shocked the world by invading Ukraine in February. And its impact on inflation and growth was felt only months later. Headline inflation was already rising by then, thanks to global supply chain disruptions and even though consumption and investment demand rebound was incomplete, the Indian economy escaped with a whole skin. FY22 GDP grew by 8.7%, lower than initial estimates of 9.2%, but compared to the 6.6% contraction in FY21, it was a much-needed booster shot to the lungs.
But its effect was short-lived and FY23 began on a nervous note as the fallouts of the ongoing Ukraine war began to be revealed. Advanced nations were barely recovering from the global supply glut and as inflation rose forcing rate hikes, major economies like the US and UK entered into a technical recession. India though showed signs of stability and was acknowledged by none other than the IMF as the 'bright spot.' Despite the global gloom and doom, Q1 and Q2 GDP grew by a moderate 13.5% and 6.3% over the previous year. All we need is 4.6% growth in Q3 and Q4 each to clock out FY23 with a 7%.
Now comes the cherry on the cake. Just as we were celebrating 75 years of Independence, news trickled in that India emerged as the world's fifth-largest economy. What made it even sweeter was that we broke into the top 5 club in style, dethroning our colonial masters -- the UK. We did achieve this feat earlier too, but couldn't sustain the spot as the India-UK output gap wasn't wide and the subsequent data revisions took us back to number 6. But now, there's a certain ring to it given that the UK is in recession, which its central bank believes will likely last till 2024. It means India will compete with the $4 trillion Germany, not the UK. Cheers to that!
Oil
2022 delivered a global oil price shocker. With the world's third-largest oil producer Russia invading Ukraine in late February, crude prices shot up to $130 per barrel by early March and stayed above $100 for several weeks. Though prices have moderated now and are under $80, fears of volatility persist. Economists at the IMF projected prices to average $92 in 2023 and $80 in 2024, while analysts see oil demand and supply struggling to keep pace in 2023. What's clear though is that oil prices will stay above the five-year average of $60 per barrel.
As the world was battling rising crude prices, India managed to outwit the crowd by striking a cut-price deal with Russia, which began selling oil at discounted prices to counter western economic sanctions. Putting national interests above diplomatic gains, the government played the perfect *jitsugyoka (*Japanese businessman as a public figure) and prevailed upon the intense pressure from the US to join forces. In just about six months, Russia emerged as our largest oil exporter, ending the decades-long dominance of OPEC producers. It also helped manage the annual import bill from blowing out of proportion and the Indian crude oil basket price is expected to average $100 in FY23.
Inflation
As oil prices jumped, headline inflation peaked at an eight-year high of 7.9% in April, forcing the RBI to hike the repo rate by 50 bps following the emergency policy review in May. Along with the fiscal measures, inflation moderated to sub-7% now.
Unlike the US and the UK, where inflation touched 40-year highs, India's price rise was relatively modest, though well above the RBI's upper tolerance band. Governor Shaktikanta Das also became the first to send a written explanation for breaching the central bank's legal mandate on price stability for three quarters in a row.
Since adopting the Flexible Inflation Targeting regime in October 2016, RBI never missed the 4% target, with a 2% leeway on either side. It came close in 2020 following the Covid-19 pandemic when headline inflation stayed above 6% for 11 months. But the government came to Das' rescue, discarding the April-June 2020 inflation data as unsuitable for computational purposes.
Thankfully, Das may not have to repeat writing the letter as he confirmed that the worst was behind us. Headline inflation is pegged at 6.7% for FY23 and expected to ease further to 5-6% in the first half of FY24. But the pesky little fact is that prices will likely remain above 4% throughout the calendar year 2023, which is why RBI's 'battle is far from over,' forcing Das to keep an 'Arjuna's eye on inflation.'
Interest rates
2022 allowed a 225 bps increase in repo rate, which in turn made loans costly. So far, RBI has raised rates five times since May and markets expect another 25 bps hike in February, taking the repo rate to 6.5%.
Like inflation, India's rate hikes too were relatively modest, unlike others that responded with 75 bps and 100 bps jackings. But 2022 will be notable for the historic rate hike blast and for compelling reluctant central bankers like the US Fed, the European Central Bank and the Bank of England to slam on the brakes and end their at least two-decades-old easy money regime.
The top 10 central banks together tightened rates by 2,700 bps in 12 months, according to Reuters. Emerging market central banks raised rates 93 times and by a total of 7,425 bps in 2022 alone.
The central bank's crusade against price rise was to tame inflation and inflation alone. But, now we are being told that such synchronised tightening is just about to land us in a global recession. This, we have from the highest authorities including the World Bank and the IMF.
Rupee
The Indian currency lived a somewhat footloose and fancy-free life in 2022. Unmindful of its commitment to the economy, the rupee touched new lows, tearing into the psychological 80 per dollar to scale upwards of 83. RBI, which has the sole power to lord over the exchange rate, intervened rather prudently, letting the currency find a level of its own liking. Both the government and RBI maintained that it wasn't a sign of the rupee's weakness, but an indicator that the dollar was strengthening. They further reasoned that the rupee was relatively better placed than other global currencies and also when pegged against the basket of other currencies.
It'll be interesting to see how the domestic unit fares against the greenback in 2023.
Unemployment
From January to November 2022, India's unemployment rate shot up by 1.4%. In August, it touched its highest at about 10%, but subsided to 8% by November, according to CMIE. Sparking fresh trouble was the massive tech industry layoffs globally, which had a spillover effect on domestic shores. Analysts, however, believe that India can tide over the crisis better than its global peers.
That said, job creation remains an unfulfilled promise and the government's scorecard will be closely watched ahead of the forthcoming assembly and general elections. For it to keep a lid on joblessness, growth needs to be robust. Will it be? That remains the grand question that 2023 will have to answer.