Economic Survey 2022 – Detailed Analysis Chapter -1

Table of Contents

Eight Core Sectors

Comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP).
Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

Consumption

Total consumption is estimated to have grown by 7.0 per cent in 2021-22 with government consumption remaining the biggest contributor as in the previous year.
The recent dip in vehicle registrations reflects persistent supply-side constraints owing to the shortage of semi-conductor chips rather than lack of consumption demand.

Investment

Investment, as measured by Gross Fixed Capital Formation (GFCF) is expected to see strong growth of 15 per cent in 2021-22 and achieve full recovery of pre-pandemic level.
Government’s policy thrust on quickening virtuous cycle of growth via capex and infrastructure spending has increased capital formation in the economy lifting the investment to GDP ratio to about 29.6 per cent in 2021-22, the highest in seven years.
While private investment recovery is still at a nascent stage, there are many signals which indicate that India is poised for stronger investment.
The number of private investment projects under implementation in manufacturing sector has been rising over the years

crowding in effect

Crowding-in is a phenomenon that occurs when higher government spending leads to an increase in economic growth and therefore encourages firms to invest due to the presence of more profitable investment opportunities.
A sturdy and cleaned-up banking sector stands ready to support private investment adequately.
RBI’s latest Industrial Outlook Survey results indicate rising optimism of investors and expansion in production in the upcoming quarters.

Exports and Imports

India’s exports of both goods and services have been exceptionally strong so far in 2021-22.
Merchandise exports have been above US$ 30 billion for eight consecutive months in 2021-22, despite a rise in trade costs global supply constraints fewer operational shipping vessels, exogenous events such as blockage of Suez Canal and COVID-19 outbreak in port city of China etc.
net services exports have also risen sharply, driven by professional and management consulting services, audio visual and related services, freight transport services, tele-communications, computer and information services.
From a demand perspective, India’s total exports are expected to grow by 5 per cent in 2021-22 surpassing pre-pandemic levels.
Imports also recovered strongly with revival of domestic demand and continuous rise in price of imported crude and metals.
Imports are expected to grow by 29.4 per cent in 2021-22 surpassing corresponding pre-pandemic levels.

However, robust capital flows in the form of continued inflow of foreign investment were sufficient to finance the modest current account deficit.
Elevated global commodity prices, revival in real economic activity driving higher domestic demand and growing uncertainty surrounding capital inflows may widen current account deficit further during the second half of the year.
However, it is expected to be within manageable limits.

What Is a Current Account Deficit?

The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).

Country with current account surplus

In 2020, according to the World Bank, the ten countries with the largest current account surpluses as a percentage of GDP were China, Germany, Japan, South Korea, the Netherlands, Italy, Singapore, Russia, Australia, and Kuwait.

The United States remained the country with the world’s largest current account deficit which rose roughly by a third to $635 billion in 2020 or 3.1% of economic output

BARBELL STRATEGY, SAFTEY NETS & AGILE RESPONSE

The last two years have been particularly challenging for policy-making around the world with repeated waves from a mutating virus, travel restrictions, supply-chain disruptions and, more recently, global inflation.
Faced with all this uncertainty, the Government of India opted for a “Barbell Strategy” that combined a bouquet of safety-nets to cushion the impact on vulnerable sections of society/business, with a flexible policy response based on a Bayesian updating of information.
It is similar to the “Agile” approach that uses feedback-loops, and real-time adjustment.
The Agile approach is a well-established intellectual framework that is increasingly used in fields like project management and technology development.
In an uncertain environment, the Agile framework responds by assessing outcomes in short iterations and constantly adjusting incrementally.
It is different from the “Waterfall” framework which has been the conventional method for framing policy in India and most of the world.
The Waterfall approach entails a detailed, initial assessment of the problem followed by a rigid up-front plan for implementation.
Waterfall approach works on the premise that all requirements can be understood at the beginning and therefore pre-commits to a certain path of action.
This is the thinking reflected in five-year economic plans, and rigid urban master-plans.
Over the last two years, Government leveraged a host of High Frequency Indicators (HFIs) both from government departments/agencies as well as private institutions that enabled constant monitoring and iterative adaptations.
Such information includes GST collections, power consumption, mobility indicators, digital payments, satellite photographs, cargo movements, highway toll collections, and so on.
These HFIs helped policy makers tailor their responses to an evolving situation rather than rely on pre-defined responses of a Waterfall framework.

Safety Nets used to Cushion Vulnerable Sections

The recognition of extreme uncertainty associated with a ‘once-in-a-century’ pandemic meant that the Government opted for a careful mix of emergency support and economic policy actions to provide a cushion against pandemic induced shocks while flexibly adapting to an evolving situation.
imposition of a stringent lockdown
ramp up testing infrastructure, create quarantine facilities
economic safety nets comprised of world’s largest free food program, direct cash transfers and relief measures for small businesses.
ramp-up of the vaccination programme

Monetary and Financial Support

The Monetary Policy Committee (MPC) cut the policy repo rate by 115 basis points (bps) during February to May 2020, on top of a reduction of 135 bps in the preceding twelve months.
Since then, the MPC has maintained status quo on the policy repo rate keeping it unchanged at 4 per cent.
The Marginal Standing Facility rate and the bank rate have also remained

VACCINATION

Vaccination has played a critical role in minimizing loss of lives, boosting confidence in the economy towards resumption of activity and containing the sequential decline in output due to second wave. As India completed one year of its COVID-19 vaccination drive on 16th January, 2022, it crossed the historic milestone of administrating more than 156 crore doses of vaccine.