If there’s one thing to seek out in 2023, it is better clarity on the state of the economy. That requires lesser uncertainty than seen in 2022, but no forecaster anticipates this; most expect an increase. There are however critical economic puzzles, confusions and mismatches that hopefully, will become clearer as statistical artefacts, activities, biases in supply and demand, and other distortions normalise in 2023. Some examples to consider are as below.
First of all, has inflation peaked or entered a new phase? A rapid easing of energy, commodity and food prices upended the inflation narrative built around these, lifting the cover on underlying inflation that’s been unrelentingly high all along. It has compelled the focus of monetary policy upon the stickiest component of inflation, about half of the retail price basket. Markets were taken aback at this shift of sight by a hawkish central bank at its December 7 review, but the signs were apparent in the Deputy Governor’s comments in the preceding review meeting minutes.
An answer will be provided by necessary insights such as the impact of inflation and restrictive monetary policy upon consumers and businesses, the normalisation of pandemic-time demand, and with these, the settling of behaviours and beliefs into customary patterns. This, in turn, will shed light on the level of potential output that has continued to mystify.
Second is growth and its evolution. There are economic activity indicators whose usefulness is affected by statistical peculiarities, sudden and sharp growth in relative prices due to specific demand and supply changes, pandemic-induced abnormalities and fundamental shifts awaiting confirmation. Many unusual effects of events in the last two years will wear off, providing cleaner insight and improved understanding.
We should be able to better interpret, for example, bank credit, whose strong uplift has generated astonishing optimism. How much of the industry credit growth owes to double-digit price growth of commodities and inputs, replacement demand or that for fresh investments? How much of the bounce in personal loans is due to the availability of semiconductor chips permitting final purchases of queued-up cars? How much of it represents a shift from other financial markets such as bonds where interest rate transmission is quick or the weakened NBFC segment to which credit has paced 28 percent each month on average this year, increasing its share of the total?
Industrial output is another specimen. Languishing below pre-pandemic levels, consumer durables and non-durables, and capital goods’ output evoke plenty of disquiet. The steep declines are at remarkable variance with the robust recovery recorded in private consumer spending in the second quarter’s national output data. The mismatch in volumes and value-added indicators will hopefully reconcile and resolve to yield us better visibility about the economy’s strength relative to trends, any shifts in the latter, and the future growth path.
Yet another example is that of tax collections. Factors sowing doubts about their accurate informational value on the state of the economy are several, e.g., the robustness induced by inflation – the GDP deflator grew 21.2 percent in the first half of this year and 25 percent one year ago; comeback spending from pandemic repression, revenge demand; and restoration of normal activities. As a result, the sustenance and future evolution of tax revenues are mired in uncertainty too. Moderating price growth and normalisation will improve both knowledge and forecasting abilities.
In the light of such inconsistencies and confusing signs, the strength of private consumption expenditure, the mainstay of Indian aggregate demand, is difficult to gauge with precision. Forecasted growth rates for this year and the next, which is a median 6.9 percent and 6 percent, respectively, as per the survey of professional forecasters, critically rest upon consumption revival.
Similar doubts apply to prospects of private investment revival - this is at odds with the recorded plunge in manufacturing in the national accounts for July-September. There’s least mystery however about net export growth which is universally predicted to slow more with a worsening global economy in 2023.
Finally, we must ask if there’s a mismatch between these puzzling tendencies and the surrounding optimism. This remains undiminished despite three rounds of downgrades to GDP growth projections by the central bank between February and December 2022, with the final quarter remaining to unfold. This gap too may resolve in 2023, which is widely perceived to be worse than in 2022.
Renu Kohli is a New Delhi-based macroeconomist. Views are personal, and do not represent the stand of this publication.
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