Budget 2022: Sajjid Chinoy On The Economic 'Speedometer' And What It Means For Policymaking
Two years after the Covid crisis hit, the Indian economy is recovering. How quickly and evenly it is recovering is up for debate. But a clear analysis is critical, particularly for policymaking.
"There's an old joke that if the speedometer isn't working, you don't know whether to accelerate or to brake and I think in Covid times it's really important for all of us to agree on what speedometer to look at," said Sajjid Chinoy, chief India economist at JPMorgan, in a conversation with BloombergQuint.
Chinoy argues that year-on-year growth rates will be misleading through the next year and judging underlying momentum is important using quarter-on-quarter seasonally adjusted growth. "That tells us what speed we're driving at at the moment, which is important."
According to the first advance estimates for FY22 GDP, the Indian economy will grow 9.2% year-on-year this fiscal year. That, according to Chinoy, still leaves the Indian economy about 6% below its pre-pandemic path, which is where the economy would have been if it had continued to grow at 6-6.5%.
Sequentially, growth in the October-December quarter will be 3-4%, with outlook for the January-March quarter now clouded due to the third wave of Covid infections.
October was very strong. November gave back a lot of those gains, suggesting that October saw pent-up, festival concentrated demand. Despite that, I think October, November, December, will still see only a 3-4% sequential increase in levels.Sajjid Chinoy, Chief India Economist, JPMorgan
For the next fiscal year, the consensus estimate for year-on-year growth is close to 7.6%. This corresponds to a 4% annualised growth momentum through the year, Chinoy said. "So, if the economy grows at 4% through the year we still have a 7.6% (year-on-year) growth number. To have 7% growth through the year, that full-year growth number needs to be at 9.3-9.4%."
Themes To Track
Beyond the headline, Chinoy points to a few important themes to track to judge the strength and nature of the economic recovery.
Activity vs. Jobs
The employment/population ratio which had averaged 38% in the six months before the pandemic has remained in the 35-36% range ever since, with December 2021 still at 36%. "To restore this ratio back to 38% would therefore necessitate the creation of another 20-22 million jobs," Chinoy wrote in a note dated Jan. 11.
One reason behind the relatively slow catch up in job creation may be the stronger recovery across the formal sector at the expense of the informal sector, Chinoy said. "Remember, the informal sector is much more labour intensive. The formal sector is much more capital intensive."
As activity moves to the formal sector in the medium term, this will be productivity enhancing in the medium term... but in the near term, the implication is that you will have job losses because activity has become more capital intensive.Sajjid Chinoy, Chief India Economist, JPMorgan
We don't have this big pool of excess savings that advanced economies have, which is why we have to look for sustained job creation as a prerequisite to sustainable consumption growth.Sajjid Chinoy, Chief India Economist, JPMorgan
A popular narrative when the pandemic hit was that excess savings, built up during the period of the pandemic, would help drive consumption. This may not hold true for India.
The savings-investment gap is reflected in the current account balance. India has returned to a current account deficit, which suggests that any excess savings of households have been depleted. Any excess savings resulting from the crisis are likely lying with the corporate sector, which is sitting on large cash balances because of record profits and not much investment, Chinoy said. "So, it's not lying with the household sector."
External And Internal Terms Of Trade
External and internal terms of trade are important to track as well and may explain the softness in rural demand being seen in sales of items like two-wheelers. "One reason could be both the internal and external terms of trade have moved away from agriculture over the last year," Chinoy said.
Input cost pressures have built up due to rising commodity prices, which can impact agricultural incomes. Also non-food prices are rising faster than food prices over much of the last year. "While recent developments may impinge on the agricultural sector, they benefit the non-agricultural sector."
Each of these factors, according to Chinoy, point to a relatively subdued recovery for consumption.
"I keep saying let's not hold out hope for private consumption recognising this backdrop; that there isn't much excess savings, the labour markets are taking time to heal," he said. "We really need to look for other growth drivers. Hopefully those will create jobs."
Those growth drivers may emerge in the form of exports and capital expenditure from the central and state governments. These, in turn, can create jobs and spur consumption and eventually private investment.
It's the jobs and the income certainty that will hopefully propel consumption and that will take time to recover.Sajjid Chinoy, Chief India Economist, JPMorgan
Fiscal-Monetary Policy Balance
With this economic background, the upcoming budget may need to continue to provide support to the economy while moving along the stated path of fiscal consolidation.
"Because this is an uneven recovery, fiscal policy is far better positioned to offer targeted support and do the capex, said Chinoy, adding that monetary will gradually have to normalise.
I think fiscal and monetary policy will gradually have to become substitutes from complements.Sajjid Chinoy, Chief India Economist, JPMorgan
The government should try and keep its fiscal deficit close to the budgeted 6.8% this year and attempt to bring it down by 0.5-0.6 percentage points over the next year.
On the revenue side, while the government may not see the same kind of buoyancy in the tax-to-GDP ratio next year as it did in FY22, funds raised via divestment may pick-up as planned share sales, such as that of Life Insurance Corporation, go through.
In terms of expenditure, the government will have enough room to take on the targeted spends necessary to support the economy.
For one, if subsidy spends, which have soared over the past two years, ease, some of that money could be redirected. "If you have a percent of GDP savings on subsidies, half a percent of that can be used to bring the deficit down and half a percent of that can be used to bolster the other parts of spending," Chinoy said.
Spending on automatic stablisers like the rural jobs guarantee scheme and capital expenditure should be two areas of priority, he added.
While the government may not see the same kind of buoyancy in the tax-to-GDP ratio next year as it did in FY22, funds raised via divestment may pick-up as planned.
As things become normal, reduce the subsidy bill, put those resources into automatic stabilisers like NREGA but more importantly, into capital expenditure so that engine keeps moving for the next year too.Sajjid Chinoy, Chief India Economist, JPMorgan
Watch the full conversation below: