Top 10 economic developments in India in year 2022

10 Jan 2023 , 09:52 AM

That was also reflected in the Sensex returns, which was up nearly 5% for the year, with only Brazil and Indonesia being the other large economies to give positive returns for the year. As we look back at 2022, there were 10 key macroeconomic factors that had a strong bearing on 2022, and such impact is likely to linger on in 2023 also.

1. Geopolitical risk reigned supreme

If there was one factor that reigned supreme in 2022, it was the rise of geopolitical risk. Russia invaded Ukraine in February 2022 to thwart American plans to include Ukraine under NATO. However, what followed was a genuine crisis of sorts. The war turned out to be long drawn as Ukraine put up a brave front with the support of the west. The real issue was the global supply chain disruptions caused by Russian sanctions, especially on oil and gas. A little more to the East, China was threatening to mark its stamp in the South China Sea by repeatedly entering Taiwanese airspace and water limits. Taiwan, in 2023, may be representative of the continuing conflict between the US and China.

1. Inflation continues to remain sticky

The big story of 2022 was sticky inflation, despite the best efforts of central banks. In the last few months, Indian CPI inflation has come down closer to 6% but still remains above the upper tolerance limits defined by the RBI. But, the bigger impact of inflation was felt on corporate results as sectors like automobiles, cement, metals and construction bore the brunt of input cost inflation. In India, it was not just manufacturing inflation, but also service inflation that spiked. That has resulted in core inflation remaining sticky around 6%.

1. Central banks have been hawkish

As the US Fed and a slew of other central banks started to hike rates to control inflation, the RBI did not have much of a choice. It could stay put, only at the cost of monetary divergence. RBI hiked repo rates from 4% to 6.25% in the last seven months and looking at the latest minutes of the RBI, it is far from done. India could see another 50 bps rate hike in the current year, so expect higher rates and higher cost of funds in 2023. Even corporate bond yield are up in the previous year from 6.8% to 8.1%.

1. Growth remained resilient

That was the good news. As per the First advance estimates (AE) of GDP growth for FY23, the GDP is expected to grow at 7% for FY23. That would still make India the fastest growing large economy in the world with a gap of at least 200-300 bps over China. To a large extent, that has been possible due to the largely domestic orientation of the Indian economy. Global demand has slowed down on recession fears and that has taken its toll on exports. In the Indian context, the economy is still largely driven by domestic consumption and domestic capital formation and that has helped growth.

1. Manufacturing suffered but services made up

FY23 has been like a tale of two economies. For FY23, as per advance estimates, the manufacturing sector is expected to grow 1.6% and agriculture at 3.5% while services are likely to make up the gap to reach overall GDP growth of 7%. While financial services and construction have seen steady growth, it is the contact intensive sectors like trade, hotels and hospitality that has grown double digits at over 13%. Apart from the revenge buying, the high level of service inflation has also helped. After a 3 year lull, the service sector is seeing return of growth once again. That is likely to continue into 2023 also.

1. PLI continued to be expanded in 2022

For a long time, India did not have an output based incentive scheme and that finally came in through the Product Linked Incentive (PLI) scheme. The scheme was unique in the sense that it not only encouraged domestic manufacturers to attempt scale, but also encouraged global manufacturers to look at India as a manufacturing option. The time was bang on target. Global companies were losing faith in China after their zero-COVID policy and supply chain disruptions. Countries like India, Vietnam and Thailand have been emerging as alternatives. PLI is expected to play a big role in this sustained transformation.

1. Sharp dip in the Indian rupee

After a long time, the rupee saw a sustained fall during the year. For calendar year 2022, the rupee fell by over 12% to Rs83/$, despite the best attempts by the RBI to defend the rupee. However, it was not just about the rupee. There were several reasons driving the fall in INR. Firstly, the dollar was in a long term strengthening mode on the back of Fed hawkishness. Secondly, FPIs had withdrawn $34 billion from Indian equities between October 2021 and June 2022 and that had a bearing on the rupee. Lastly, the rising trade deficit also put pressure on the rupee, leading to the sharp fall from Rs74/$ to Rs83/$.

1. Dipping forex reserves defending the rupee

Year 2022 was also a year that saw a sharp dip in the forex reserves. From a high of $647 billion, the reserves fell sharply down to $525 billion before recovering back to $564 billion towards the end of the year. However, one can expect more recovery in the reserves in 2023. One of the main reasons for the sharp fall in forex reserves in 2022 was that the RBI aggressively defended the rupee. RBI spent more than $100 billion, selling dollars to defend the rupee. This combined with FPI outflows resulted in a sharp fall in the forex reserves. This left India with one risk exposure. Forex reserves used to be equivalent to 13-14 months of merchandise imports till the end of 2021. In year 2022, this forex cover for imports fell to just about 8-9 months. This is much lower than BRICS standards, but hopefully this should improve in the year 2023.

1. Current account deficit likely to be elevated

For the September quarter the current account deficit at $36.4 billion was an all-time record for the Indian economy. At 4.4% of GDP, the Current Account Deficit (CAD) is in worrying zone. However, the likes of Citi have expressed confidence that India could end FY23 with CAD of less than 2.9% of GDP. That is because, the merchandise trade deficit is likely to be amply compensated by the sharp surge in services exports. However, India must remember that any CAD ratio of more than 2.5% of GDP will keep the rupee under pressure and the sovereign ratings undress strain.

1. Spike in per capital income in year 2022

In a sea of headwinds and challenges, here was the good news for the Indian economy. Per capital income is the GDP divided by the population and shows unit wealth of Indians. For FY22, the per capital income at a nominal level was 16.7% higher. More importantly, as per the latest GDP first Advance Estimates, the dollar per capital income for FY23 is likely to gravitate towards $2,300, which is the highest in a long time. 

The year 2022 has not been great for most of the world economies. For a domestically focused Indian economy, there have still been some redeeming features.