2022: For India, a year of consolidation after Covid-19
The year could be about a new India growth story, if a few things go right for the country
past two Covid-19 years, avoiding the spending and debt pile-ups of others. It has preferred to attract the excess capital sloshing around the world by pushing significant changes in the green energy and digital space, and further opening the door to foreign investors. It can claim a fair degree of success, writes Pramit Pal Chaudhuri. Investment flows have been strong, foreign exchange reserves are overflowing, and, partly as a consequence, the formal sector and the start-up space are looking healthy. Assuming Omicron is a viral goodbye, this year will be where the rubber hits the road. With inflation surging, the world’s central banks will now pull the plug on money printing. As this financial ebb tide courses through the year, many emerging economies will flounder. India will suffer, but Prime Minister Narendra Modi’s reforms should mean India will handle the taper tantrum better than most.
The Indian government has been financially cautious during the past two Covid-19 years, avoiding the spending and debt pile-ups of others. It has preferred to attract the excess capital sloshing around the world by pushing significant changes in the green energy and digital space, and further opening the door to foreign investors. It can claim a fair degree of success. Investment flows have been strong, foreign exchange reserves are overflowing, and, partly as a consequence, the formal sector and the start-up space are looking healthy.
Assuming Omicron is a viral goodbye, this coming year will be where the rubber hits the road. The slosh is over. With inflation surging globally, the world’s central banks will now pull the plug on money printing. The most important fount, the United States (US) Federal Reserve, will do so by March. As this financial ebb tide courses through the year, many emerging economies will flounder. India will suffer, but Prime Minister (PM) Narendra Modi’s continual reforms during the pandemic should mean India will handle the taper tantrum better than most.
A recognition that Modi used his political capital to make difficult economic choices that many world leaders ran away from will be more evident as 2022 unfolds. Not that there won’t be bad news. India will struggle with higher inflation and elevated oil prices even as it racks up decent growth. Its herd of unicorns will start to thin out. But, after a quarter of wait and watch, investors, home and abroad, should begin placing large bets on India again.
There are a few things that are likely to support this positive scenario.
The first is an expectation of geopolitical quietness. India’s most dangerous strategic rival, China, is looking for its year of consolidation. Xi Jinping wants to be confirmed for a third term next winter. He has earned points for breaking up the tech and real estate oligopolies that impeded China’s future growth. But, as Modi can testify, such actions are economic downers in the short-term. Xi will be looking to soft-land the Chinese economy until his re-election is confirmed later in the year. Border battles and the loss-making Belt and Road Initiative are a poor fit.
Pakistan is essentially a danger to itself. It has done exactly what an emerging economy should not have done during the past few years. PM Imran Khan has not carried out any reforms and made life more difficult for business. His economy is a bellwether for the high prices, poor growth, and debt issues that will afflict many other developing countries. Pakistan’s great success of 2021, the resurrection of the Taliban regime, will be the neighbour from hell: An exporter of refugees, heroin and terror.
The larger geopolitical landscape will be about converting language into deeds, especially in strategic technology. The two Quads, the Australian submarine triad, and the new Us-sponsored Indo-pacific Economic Framework, have one common feature: Kick starting negotiations about future technology standards, investment and development. Much of this has been outlined in documents, and statements amount to not very much.
This year will be about filling in the details, working out how exactly the emerging US and China camps can set up parallel networks for artificial intelligence, 5G, quantum computing and nextgen pharmaceuticals. The result will be a year of quiet buzz and minimal fireworks — except in parts of the world outside these tech alliances. The nerds will dominate the negotiating tables, not the generals.
At home, the most important tasks facing Modi will be avoiding setback in the Uttar Pradesh elections and restoring consumer confidence among the lower quintiles of the population.
The election, increasingly uncertain the more it becomes a two-party contest, is necessary if he wants to carry out last-minute tweaks to the economy before campaigning for a third term begins. Power sector reforms stand out as they would ensure external financing for India’s green transition. A much more difficult task will be to get the informal urban sector, probably the most ravaged by earlier reforms and the lockdowns, to start ticking again. Again, the theme will be policy consolidation: Less roller-coaster and more smooth sailing.
The icing on the 2022 cake would be evidence that the Modi government’s new trade policy exists. New Delhi hopes to get its free-trade agreements with the United Arab Emirates, Britain and Australia done this year.
These will be new-format trade agreements — weighted more towards services, immigration and technology, less towards agriculture and manufactured goods. The budget may need to do some signalling with lowered tariffs.
These trade agreements will be smaller and less ambitious, but will reflect what is likely to be the new global norm for trade talks. If these merge successfully with the new manufacturing incentive schemes, 2022 will be as much about the start of the new Indian growth story as it will be about the end of a pandemic.