Omicron’s wildcard entry has injected uncertainty into next year’s outlook and dashed hopes of the virus disappearing by 2022. Omicron, if severe, can slow economic recovery, and the United States (US) Fed surprises can make capital flows and currency volatile. While not immune, India can take succor from the fact that it is somewhat better placed to withstand monetary policy surprises from the US this time. The key reasons for this are lower current account deficit (CAD) and a healthy forex shield versus the taper tantrum in 2013.

Trends that will shape India’s outlook for the coming fiscal are our ability to live with the virus and the strength of private consumption demand, which is typically the bulwark of the Indian economy, though currently fragile. Experience tells us that successive waves, even if they create a serious health scare and overwhelm the medical infrastructure, are less damaging to an economy. So, even if an omicron-led third wave plays out, it is unlikely to be as lethal for healthcare or the economy as the first or second. More vaccinations and learning to live with the virus have also led to progressively less-stringent lockdowns.

Having said that, one key worry from the point of sustainability of growth is weak private consumption demand and frail consumer sentiment. The share of private consumption in the gross domestic product (GDP) has been consistently falling since the pandemic struck and the latest Reserve Bank of India (RBI) survey confirms weak consumer sentiment.

This consumption pattern also mirrors the widening income inequality spawned by the pandemic. While demand for high-ticket items such as cars and utility vehicles, remains strong and is expected to cross the pre-pandemic level this year, that for two-wheelers and some white goods remains relatively weak. Output in construction and trade, hotels, tourism and other contact-based services is highly labor intensive and trails pre-pandemic levels, making employment in these segments a casualty.

On the positive side, the information technology (IT) and IT enabled services sector, which employs over 4 million people directly and many more indirectly, is seeing a strong revival, and this will support demand for goods, services, and real estate. If the pandemic remains under control and the aforementioned services pick up, urban incomes should increase. That along with lowering of fuel inflation could provide some support to private consumption through the next fiscal. The monetary policy will begin to normalize soon, handing the baton to fiscal policy, which needs to play a supportive role while engineering a calibrated reduction in deficits. All eyes on the budget for clarity on that front.