in World Economy News 04/01/2022
As we step into a new year, happy statistics and data from 2021 crowd the mind. The Nifty finishes among the best performing global indexes with again of 24 percent; Nifty midcap returned 46 percent and the Nifty 100, a whopping 59 percent.
This was backed by earnings.
The Nifty EPS is estimated to grow a whopping 35 percent to Rs 730 this fiscal, even as the country’s GDP will have grown 9.5 percent in real terms and about 14 percent in nominal terms. The usually conservative Reserve Bank announced that bad loans as a percentage of total loans was down to 6.9 percent in September 2021 from 7.5 percent year ago. 6.9 percent of Gross NPAs is a decadal low.
India has usually been described as a country of rich people but poor governments. Just this once, the government is collecting more taxes than it estimated. The April-November fiscal data which was out on the last working day of 2021 show that tax revenues are up 56 percent from year ago levels.
And these ought not to be dismissed as merely impact of a low base; the April Nov tax collection is 51 percent above 2019-20 levels – a non covid year – indicating a two year compounded annual growth of 24 percent. This is spectacular considering that nominal GDP over these two years is estimated to have grown (compounded annually) by only 5 percent per annum.
Looking into 2022-23, again a bunch of positive forecasts come to the mind. Consensus estimates from brokerages say the Nifty EPS – a good benchmark for the formal sector – is expected to grow by a further 19 percent to Rs 873. Inflation, after a jump to 6 percent-plus in January and February is seen receding towards 5 percent by the end of the year, per RBI forecasts.
If a 35 percent earnings growth has led to a 56 percent growth in taxes in the current year, a 19 percent growth in earnings should at least generate a 25-30 percent growth in taxes in FY23.
Government should be able to continue a fair amount of stimulus and/or lower fiscal deficit with less pain, next year.
The current account deficit for the quarter ended September 30, 2021 has come in at 1.3 percent. For the full year, economists are veering towards a current account deficit of 1.7 percent.
A current account deficit around 2 percent has been India’s stable zone for the past three decades. Trade deficit, with a monthly tally of over $20 billion since September, appears to be a worry, but it may be pent up demand, or even pent-up supplies given dislocations in global transportation.
At any rate, an over $635 billion of forex kitty gives plenty of room for adjustment. Going by the FY22 trends, services exports or invisibles should also come in strong next year.
Consensus GDP estimates for FY23 lie between 7.5-8 percent. But there are doubts about the medium term steady state growth. Some economists worry, maintaining the 7 percent-plus momentum could be tough given the permanent scars caused by the pandemic. India’s informal sector, already maimed by a slowdown underway since 2016, has been hurt repeatedly by demonetization and then COVID-19. CMIE data shows that labour participation in India is as low as 40 percent, (even after post-pandemic recovery) versus 43 percent per pandemic.
Average monthly household incomes, as of June 2021 were at Rs 18,996 versus Rs 19,262 as of June 2018 and Rs 20,369 as of June 2019, CMIE says. Clearly the informal sector is hurting and that is a cross the economy has to bear in 2022.
But the economy may well be at an inflection point last seen in 2004-2008, as Morgan Stanley’s Chetan Ahya argues. Corporate and bank balance sheets are all cleaned up; the IT sector is in a recruitment frenzy that is leading to a resurgence of the long comatose realty sector. Also India registered 43 unicorns in 2021, which collectively attracted investments worth $36 billion last year alone. A resurgent IT, start-up and realty sector could lead to a virtuous cycle of employment and consumption.
More important, most economists agree the US should show strong growth in 2022. This pleasant combination of global growth, cleaned -up Indian balance sheets and a resurgent IT and realty sector had also marked the 2004-2008 period. Government had also spent big on infrastructure in that period. It is conceivable that, the government will do so again, given that it has more tax money to spend, thanks to higher corporate earnings as shown earlier. Also GST implementation has stabilized and is probably tempting more activities into the formal, taxable net.
For the more medium term, 2021 threw up another important statistic: India’s fertility rate is down to 2 according to the latest National Family Health Survey (NFHS) released by the Union Health Ministry in November 2021. This means two parents are being replaced by two children. India’s population is all set to peak off in a few years. This means many Indian human development averages like teachers per hundred students or hospital beds per 100 are set to improve because of decreasing population pressure; at least they wont get adverse. China reached this stage in 1991 to harvest huge gains in growth and development.
Thus 2022, could well see a combination of the economic positives of the 2004-2008 period and the sociological positives of a fertility rate of 2. Of course there are challenges from climate, COVID and legacy issues of education and health. But, on balance, India may well have the best chance to better these problems. I would like to argue it looks like a happy 2022.
‘This too shall pass away’ this famous Persian adage seems to be defeating us again and again in the case of COVID-19. Despite every effort