The optimism is driven by record vaccination, greater awareness about virus management and better emergency response in case of a surge in infections. While some states are bringing in measures such as night curfew to combat any sharp spike, there is a growing feeling that authorities may not need to resort to strict curbs that may affect economic activity. Experts reckon that there could be a short term impact on some sectors but it is unlikely to be as severe as seen in the previous surges.
“Uncertainty with respect to the transmission, virulence and immunity evasion of the Omicron variant is clouding the economic outlook once again. Exactly a year ago, we were grappling with ambiguity with respect to virus mutations and efficacy of vaccines.
But, 2021 has also helped us understand the virus better, helping in turn policymakers to create better health infrastructure and carve more chiselled restrictions to limit economic spillovers,” said Yuvika Singhal, economist at analytics firm QuantEco Research.
“Against this background, despite the risks of Omicron being very real, we continue to believe that domestic growth inflation dynamics will remain favourable in FY23. On GDP, we are estimating a growth of 7.5% in FY23 (against 10% with mild downside risks in FY22) driven by a combination of continued rollover in pent up demand along with an uneven pick-up in private capex in select sectors,” said Singhal.
Economists said the RBI is likely to persist with efforts to support growth for now and may postpone any moves to raise interest rates to mid-2022. While inflation may prove to be an obstacle in the short term, the need to shield the economic recovery would be the dominant factor driving the central bank’s decisions. The Budget for FY23, which is likely to be unveiled in February, would also be a key factor in the RBI’s decision.
“While the emergence of Omicron has reignited uncertainty, we are cautiously optimistic that the economic recovery in India will become more durable and broad-based in the coming year. Rising confidence should support a return of consumption to normalcy, boosting capacity utilisation and setting the stage for broadbased capacity expansion by the end of 2022. Moreover, the solid expansion in direct taxes will allow the government to prioritise growth-enhancing capital spending,” said Aditi Nayar, chief economist at ratings agency ICRA.
“With a higher inflation target than other central banks, the monetary policy committee (MPC) can justify prioritising growth for some more time. Nevertheless, the base case of gradually strengthening economic activity suggests that it is only a matter of time before the MPC starts to raise rates,” said Nayar.