Economic Survey 2022 – Detailed Analysis Chapter -1

Table of Contents

State of the Economy

The last two years have been difficult for the world economy on account of the COVID-19 pandemic. Repeated waves of infection, supply-chain disruptions and, more recently, inflation have created particularly challenging times for policy-making.
Faced with these challenges, the Government of India’s immediate response was a bouquet of safety-nets to cushion the impact on vulnerable sections of society and the business sector.
It next pushed through a significant increase in capital expenditure on infrastructure to build back medium-term demand as well as aggressively implemented supply-side measures to prepare the economy for a sustained long-term expansion.
This chapter explains how this flexible and multi-layered approach is partly based on an “Agile” framework that uses feedback-loops, and the monitoring of real-time data.
Advance estimates suggest that the Indian economy is expected to witness real GDP expansion of 2 per cent in 2021-22 after contracting in 2020-21.
This implies that overall economic activity has recovered past the pre-pandemic levels. Almost all indicators show that the economic impact of the “second wave” in Q1 was much smaller than that experienced during the full lockdown phase in 2020-21 even though the health impact was more severe.
Agriculture and allied sectors have been the least impacted by the pandemic and the sector is expected to grow by 3.9 per cent in 2021-22 after growing 3.6 per cent in the previous year.
As per RBI, Gross capital formation refers to the ‘aggregate of gross additions to fixed assets (that is fixed capital formation) plus change in stocks during the counting period.’

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Exports of both goods and services have been exceptionally strong so far in 2021-22, but imports also recovered strongly with recovery in domestic demand as well as higher international commodity prices.
The Indian economy is in a good position to witness GDP growth of 8.0-8.5 per cent in 2022-23.
India’s balance of payments remained in surplus throughout the last two years.
This allowed the Reserve Bank of India to keep accumulating foreign exchange reserves (they stood at US$ 634 billion on 31st December 2021).
This is equivalent to 13.2 months of merchandise imports and is higher than the country’s external debt.
The balance of payments (BOP), also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year.
It summarizes all transactions that a country’s individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.
The balance of payments includes both the current account and capital account.
The current account includes a nation’s net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments.
The capital account consists of a nation’s transactions in financial instruments and central bank reserves.
The sum of all transactions recorded in the balance of payments should be zero; however, exchange rate fluctuations and differences in accounting practices may hinder this in practice.
the banking system is well capitalized and the overhang of Non-Performing Assets seem to have structurally declined even allowing for some lagged impact of the pandemic.
Inflation has reappeared as a global issue in both advanced and emerging economies.
India’s Consumer Price Index inflation stood at 6 per cent YoY in December 2021 which is within the targeted tolerance band.
Wholesale price inflation, however, has been running in double-digits.
Although this is partly due to base effects that will even out, India does need to be wary of imported inflation, especially from elevated global energy prices.
Government of India opted to use safety-nets for vulnerable sections on one hand while responding iteratively based on Bayesian-updating of information.
This “barbell strategy” was discussed in last year’s Economic Survey.
A key enabler of this flexible, iterative “Agile” approach is the use of eighty High Frequency Indicators (HFIs) in an environment of extreme uncertainty.
Bayesian statistics treats probability as a degree of belief, Bayes’ theorem can directly assign a probability distribution that quantifies the belief to the parameter or set of parameters

The barbell strategy is an investment concept that suggests that the best way to strike a balance between reward and risk is to invest in the two extremes of high-risk and no-risk assets while avoiding middle-of-the-road choices.
Investors who follow the barbell strategy insist that the way to achieve that is to go to extremes.
The strategy hedges for a worst outcome initially and then calibrates the response step by step through a feedback mechanism.

5T Approach

The lockdown provided the necessary time to put in place the fundamentals of the ‘5 T’ strategy – Test, Track, Trace, Treat, Technology.
As the first step towards timely identification, prompt isolation & effective treatment, higher testing was recognized as the effective strategy to limit the spread of infection,

Economy recovers past Pre-Pandemic levels

quarterly estimates of GDP, has been staging a sustained recovery since the second half of 2020-21.
Although the second wave of the pandemic in April- June 2021 was more severe from a health perspective, the economic impact was muted compared to the national lockdown of the previous year.
Advance estimates suggest that GDP will record an expansion of 9.2 per cent in 2021-22.
In calculating quarterly GDP, the first estimate published approximately one month after the end of a quarter.
As a result, the advance estimate is considered important as a guideline to performance in a quarter, but it is not necessarily the most accurate measure.
the area sown under Kharif and Rabi crops, and the production of wheat and rice has been steadily increasing over the years.

In the current year, food grains production for the Kharif season is estimated to post a record level of 150.5 million tonnes.
Procurement of food grains under the central pool accordingly maintained its rising trend in 2021-22 along with minimum support prices, which augur well for national food security and farmers’ incomes.

the strong performance of the sector was supported by
Government policies that ensured timely supplies of seed and fertilizers despite pandemic related disruptions.
It was also helped by good monsoon rains as reflected in reservoir levels being higher than the 10-year average
Since January 2021, the widely used Purchasing Managers’ Index- Manufacturing has remained in the expansionary zone (i.e. over 50) except for one month when the second wave had slowed down economic activity

Purchasing Managers’ Index

PMI or a Purchasing Managers’ Index (PMI) is an indicator of business activity — both in the manufacturing and services sectors.
It is a survey-based measures that asks the respondents about changes in their perception of some key business variables from the month before.
It is calculated separately for the manufacturing and services sectors and then a composite index is constructed
The PMI is derived from a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms,
are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.
A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
The Index of Industrial Production (IIP) and Core Industry indices have both followed a similar pattern
IIP is an indicator that measures the changes in the volume of production of industrial products during a given period.
compiled and published monthly by the National Statistical Office (NSO),Ministry of Statistics and Programme Implementation.
Broad sectors, namely, Mining, Manufacturing and Electricity
Use-based sectors, namely Basic Goods, Capital Goods and Intermediate Goods.
IIP index is currently calculated using 2011-2012as the base year.

In contrast to contact-based services, distance-enabled services have increased their share with the growing preference for remote interfaces for office work, education and even medical services. Indeed, there has been a boom in software and IT-enabled services exports even as earnings from tourism have declined sharply