There is no doubt that the economy will face a series of challenges in the months to come. The first has already appeared just when it looked like the country was emerging from the pandemic doldrums. A new variant of Covid has burst in with the potential to stop the nascent recovery process. The prospect of a V-shaped recovery has diminished and only a K-shaped or uneven recovery process is visible at present.
As Covid cases increase across the country, experts are giving assurances that the new variant has milder symptoms and could lead to far fewer hospitalizations and deaths than the previous Delta. But other experts say the prospect of many people, especially healthcare workers, falling ill at the same time could cripple medical infrastructure. Cries for help are already emerging on social media from medics in the United States battling the virus with staff cut off due to colleagues falling ill, albeit with mild symptoms. Caution is therefore in order, but visuals from across the country show carefree crowds during the holiday season and also in the markets.
The outcome of the third wave, although in its infancy, will be revealed much later. But immediately managing its impact on the economy becomes a major challenge for central and state governments in 2022. It has already taken its first victim. The contact-intensive sectors that were on the verge of reappearing in recent months are once again facing a slump. The restaurant and hospitality industry, which employs millions of workers, has faced another setback. The aviation sector that had just returned to pre-pandemic passenger traffic levels is now likely to face reduced takeoffs. West Bengal has already cut back on flights from Mumbai and Delhi. The vast hotel industry in the formal and informal sector clearly faces a bleak future.
This brings us to the related issue of unemployment which is the worst aspect of the pandemic since March 2020. The employment scenario was not bright even before the Covid virus reached these shores. It became a crisis after the lockdown last year. The latest data from the Center for Monitoring Indian Economy (CMIE) shows that the unemployment rate hit a four-month high of 7.9% in December. On the positive side, rural areas continued to outperform urban segments in employment data. But the quality of rural jobs continues to be poor as many others rely on employment programs like MGNREGA. In other words, more jobs are available largely for unskilled labor, while better-quality jobs in urban areas are on the decline, according to the CMIE.
The harsh reality is that most of the employment in the country is in the informal sector. Migrant workers struggling to return to their rural homes after last year’s lockdown have not all returned to work in urban areas. Many are simply no longer available as establishments are reluctant to rehire staff due to the yo-yo situation resulting from the start of the second wave. The jobs crisis is worsening at the moment. It does not prevent reference to it while welcoming the faster recovery of the formal sector. Prime Minister Narendra Modi, for example, did not mention jobs while citing several key economic indicators recently to point out that things are now even better than before the pandemic in many ways. But unless unemployment rates drop significantly, the pain of unemployment will continue to haunt those at the bottom of the pyramid.
There will also be external challenges in the coming year. The biggest concern is the hardening of global oil prices. These had jumped last October to 86 dollars a barrel for the benchmark Brent crude, an unsustainable level for a country which imports more than 80% of its consumption. The market had shown a downward trend over the past month due to Omicron fears. But that has now been reversed due to reports of mild symptoms by those affected by the new variant, indicating that it may not be too disruptive to the global economy.
High oil prices in recent months have already affected the current account, which went from surplus to deficit in the second quarter (July to September). This is mainly explained by the widening of the trade deficit to 44.4 billion dollars against 30.7 billion dollars in the previous quarter. The widening deficit is not an immediate concern as it also reflects the dynamism of the economy due to the rise in non-oil imports. But a continued rise in the cost of oil imports will be problematic at a time when revenues must be allocated to other key sectors such as vaccinations, infrastructure investments and rural employment programs.
Rising global oil prices will also create new inflationary pressures as the consumer price index moves up. Inflation is another challenge that policymakers need to tackle. The large contribution of oil to the rise in prices will be difficult to manage as global oil markets are expected to remain volatile. The need to balance concerns about inflation with the need to promote growth is one of the dilemmas facing the country’s central bank. These are the same issues facing banks in many other countries. Even in developed economies like the United States, inflation has reached unprecedented levels and this should spell the end of the easy liquidity policy of recent times.
There are certainly many positive economic indicators as the country heads into 2022. These include monthly GST collections that hold over Rs 1 lakh crore over a six-month period and foreign exchange reserves reaching record levels. Exports are also exploding and 10,000 start-ups have sprung up in the past six months. But these cannot remove other disabilities that can cause stunted growth. High unemployment, the continued collapse of contact-intensive segments, rising oil prices and inflationary pressures are all factors that may hamper efforts to revive the economy and improve welfare. to be masses.