Seven percent annual growth and the realities in India
iasparliament
September 07, 2022
Why in news?
The performance of the Indian economy is not fully normalised yet and would be consistent with a growth of 6.5% to 7%.
What is the background?
The National Statistical Office’s real GDP growth estimate of 13.5% for the first quarter of 2022-23 is 2.7% points lower than the Reserve Bank of India’s earlier assessment of 16.2%.
Assuming that the central bank’s estimates of the remaining three quarters of the fiscal year at 6.2% in 2Q, 4.1% in 3Q, and 4% in 4Q are realised, the annual GDP growth using the NSO’s 1Q estimate works out to be 6.7%.
Compared to the pre-COVID-19 GDP level of Rs. 35.5 lakh crore in 1Q of 2019-20, real GDP at Rs. 36.9 lakh crore shows an increase of only 3.8%.
This indicates that the performance of the Indian economy is not fully normalised yet which would be consistent with a growth of 6.5% to 7%.
In order at least to reach an annual growth of 7%, GDP may have to grow at about 5% in 3Q and 4Q of 2022-23.
What is the composition of growth?
Out of the eight Gross Value Added (GVA) sectors, the first quarter growth performance is higher than the average of 12.7% in
Public administration, defence and other services (26.3%)
Trade, hotels, transport et al. (25.7%)
Construction (16.8%)
Electricity, gas, water supply et al. (14.7%).
Agricultural growth has remained robust, showing a growth of 4.5% in 1Q of 2022-23, which is the highest growth over nine consecutive quarters.
Growth in manufacturing, at 4.8%, however, is much below the overall average.
On the demand side, all major segments showed magnitudes in 1Q of 2022-23 that were higher than their corresponding levels in 1Q of 2019-20.
The ratio of gross fixed capital formation to GDP at current prices is 29.2% in 1Q of 2022-23 which is 1% point higher than the investment rate of 28.2% in the corresponding quarter of the previous year.
The contribution of net exports to real GDP growth is negative at minus 6.2% points in 1Q of 2022-23 since import growth continues to exceed export growth by a tangible margin.
Such an adverse contribution of net exports to real GDP growth is an all-time high for the 2011-12 base series.
Will there be feasibility in the growth?
The Indian economy may still show a 7% plus growth in 2022-23 provided it performs better in the subsequent quarters, particularly in the last two.
It would be important to further increase the investment rate and to reduce the magnitude of negative contribution of net exports.
Available high frequency indicators for the first four to five months of 2022-23 indicate continuing growth momentum.
Headline manufacturing Purchasing Manager’s Index (PMI) was at an eight-month high of 56.4 in July 2022.
It remained high at 56.2 in August 2022. PMI services were at 55.5 in July 2022, indicating 12 consecutive months of expansion.
Outstanding bank credit by scheduled commercial banks (SCBs) grew by 15.3% in the fortnight ending August 12, 2022.
Gross Goods and Services Tax collections have remained high at Rs. 1.49 lakh crore and Rs. 1.43 lakh crore in July and August 2022.
This may be due to the higher inflation levels of both Wholesale Price Index (WPI) and Consumer Price Index (CPI).
GVA growth has been led by public administration, defence, and other services, with a growth of 26.3%.
This has been driven by the central government’s frontloading of capital expenditure.
The Centre’s capital expenditure grew by 62.5% during the first four months of 2022-23.
This momentum needs to be maintained, which can be facilitated by a buoyant growth in the Centre’s gross tax revenues.
The large gap between the GDP and the GVA indicates a high implicit price deflator (IPD) based inflation.
This in turn is because of the ongoing WPI and CPI inflation trends where the former continues to exceed the latter.
What is the way forward?
With buoyant tax revenue growth, fiscal policy may strongly support GDP growth without making any significant sacrifice on the budgeted fiscal deficit target.
The key to growth lies in raising the investment rate.
The capacity utilisation in industry helps to attract private investment if demand for goods continues to increase.
India’s growth path in the next few years must depend on domestic investment picking up.
Sector-wise growth in investment must be the focus of policymakers in removing bottlenecks and creating a favourable climate.
