The recent GDP figures of India appear to be light in the sky at a time when other major economies are suffering from a downward trajectory.
Beating the advanced estimates by 0.2%, the latest data shows that India’s GDP has grown at 7.2% in FY 2022-23. There were several factors at play that led to the phenomenal rise in the GDP, especially after witnessing the downturn in the first quarter.
The 4th quarter growth has gone to 6.1% against the previous estimates of 5.1%
It becomes significant because Europe has started receding towards recession, with Germany, the 4th largest economy, having already gone into a technical recession, against the backdrop of continuing Russia-Ukraine war and disruption of global supply chains.
With this in mind, let’s analyze the key factors that pulled India’s economic growth last year and what lies ahead in the future.
Since 2011, private sector spending in India has been stagnant, failing to show significant growth.
However, a promising shift occurred in 2020, with the last quarter experiencing a notable increase, marking the first positive upturn since 2011.
This development serves as a strong indication of an impending rise in the overall share of private investments in the forthcoming quarters. As of March 2023, private investments worth Rs. 55 trillion are currently under implementation.
Private investments play a pivotal role in driving economic growth and reflect the positive outlook of companies towards the nation’s future.
However, given the current uncertainties in the global economy, private investments may not witness further growth in the upcoming quarters.
As a result, the onus of driving investments will still largely rest on the government to ensure sustained progress and development at least in the short run.
As far as government investment is concerned, it has experienced a significant surge, rising from 1.46 trillion to 2.46 trillion rupees between the third and fourth quarters.
Moreover, in terms of its percentage contribution to the GDP, government investment has increased from 26.7% to 31.7% during the same period, primarily led by the central government.
This noteworthy contribution emphasizes the government’s continued role in driving major capital expenditure to sustain GDP growth, a trend that is expected to persist in the forthcoming quarters as well.
By dedicating a larger portion of the GDP to investment, the government aims to bolster various sectors and initiatives that contribute to overall development.
This proactive approach underscores the government’s determination to maintain robust GDP growth and signals its intention to continue prioritizing capital expenditure in the foreseeable future.
In recent years, the agricultural sector has witnessed consistent growth even after the challenges of Covid-19 and the global economic meltdown.
It has surpassed expectations even in the face of adverse weather conditions and reduced productivity. In 2023, the sector experienced a growth rate of 4%, exceeding the previous year’s growth of 3.5%.
Upon analyzing the quarterly data, the first two quarters exhibited a substantial increase in the output of Rabi crops, despite the challenges posed by untimely rainfall.
This positive trend can be attributed to the government’s consistent procurement efforts.
Moreover, the government has ensured the availability of fertilizers, credit facilities, and other essential equipment at subsidized rates in the midst of the global supply crisis of essential agricultural items.
For instance, India imports fertilizers from Russia, and as the war started, the prices of fertilizers rose substantially. Still, the government is ensuring the availability of fertilizers at subsidized rates.
The favorable conditions have not only contributed to the overall growth of the sector but have also resulted in an increase in farm income.
The service sector has surpassed the advanced estimates, exhibiting a remarkable growth rate of 28.3%.
This impressive performance can be primarily attributed to the sectors such as hotels, trade, transport, finance, banking, insurance, and real estate.
Additionally, services exports have played a crucial role in boosting net exports, resulting in a notable increase of 13.6%.
The robust growth observed in the service sector has had a substantial impact on the GDP figures for the fourth quarter, subsequently influencing the overall annual figures.
However, it does not necessarily reflect a proportional rise in consumption across all segments of society. Instead, it is predominantly driven by affluent individuals who have increased their spending on hotels, travel, and luxury items.
Furthermore, the financial services sector has witnessed growth due to an upsurge in bank deposits and overall credit activity. It is worth mentioning that credit growth may moderate in the upcoming year due to the anticipation of higher interest rates.
This potential moderation could have implications for the service sector, particularly in terms of credit-driven spending.
Nonetheless, the remarkable performance of the service sector and its contributions to GDP growth remain significant factors in the overall economic landscape.
The construction sector has demonstrated a noteworthy double-digit growth rate of 10.4%.
This impressive growth can be primarily attributed to the government’s strategic capex push and a gradual upturn in private sector expenditure during the March quarter.
Being India’s second largest employer, the construction sector’s significance in driving the country’s GDP growth cannot be overstated.
Firstly, it reflects substantial capital expenditure within the economy, consequently providing a substantial boost to the country’s infrastructure development and augmenting the income of its citizens.
Secondly, the sector’s reliance on a sizeable labor force signifies a robust growth in overall employment generation throughout the country.
Nevertheless, it is crucial to recognize that the responsibility for employment and investment generation cannot rest solely on the shoulders of the government.
It is imperative for the private sector to amplify its capital expenditure in order to stimulate the wheels of the economy.
Furthermore, with the exception of a few states, such as Uttar Pradesh, many state governments still lag in public investment, placing the onus primarily on the central government to invest in major infrastructure projects nationwide.
Therefore, state governments must also intensify their investments in the construction and related sectors to foster increased employment opportunities throughout the country.
India’s core sector encompasses eight essential industries that serve as the bedrock of the country’s tangible growth. These industries include coal, electricity, steel, cement, fertilizers, natural gas, crude oil, and refinery products.
In the fiscal year 2022-2023, the core sector witnessed a growth rate of 7.6%. However, recent months have seen a decline in this growth trajectory.
Notably, in April, the growth rate reached a six-month low of 3.5%, falling below the previous month’s growth of 3.6%.
These eight core industries collectively account for 40.27% of the components considered in the Index of Industrial Production (IIP). Therefore, any decline in the core sector indicates reduced industrial production and infrastructure growth within the country.
This decline could potentially pose challenges in the upcoming quarters, particularly since the projections do not indicate a favorable trend for a further rise in the GDP figures.
Bone of Contention
Manufacturing sector growth and its contribution to the GDP have remained grim this year as well. It grew at 1.3%, which is very minimal compared to last year’s growth (11.1%).
The sector had negative growth in the previous two quarters except for the last quarter, where it witnessed growth of 4.5%. The reasons stem from the easing of commodity prices and contraction in the profit margins of the companies due to higher input prices.
Then why is there a stark difference between the last year and this year’s growth?
As last year’s data had a low base due to Covid-19, the growth seemed to pick up at a higher rate. Therefore, comparing this year’s data to last year’s will not be suitable.
Still, there is a major scope for improvement in the manufacturing sector, and as the government is promoting manufacturing through favorable schemes and tax breaks, it remains to be seen how this sleeping sector will rise in the coming quarters.
As manufacturing is a capital-intensive business, there is no scope for a substantial rise in upcoming quarters, and growth in manufacturing can be compared only in the long run.
Inflationary pressures continue to hinder demand growth in the country.
However, in recent months, a reversal of this trend can be observed, primarily due to the monetary tightening measures implemented by the Reserve Bank of India (RBI) and increased employment generation resulting from government spending on infrastructure projects.
Furthermore, there are indications that inflation may decrease in the upcoming quarters. This can be seen in the Wholesale Price Index (WPI), which has exhibited a negative trend, indicating a decline in inflation in previous quarters.
Notably, the RBI has recently raised policy rates further, demonstrating the government’s proactive stance in combating inflationary pressures.
However, it is important to acknowledge that such actions may have short-term implications on demand and credit growth in the economy.
The rise in consumption levels is not matching the pre-pandemic standards, as it is growing at a rate of 2.8%. This growth rate is insufficient to sustain the overall economic growth of the country.
Several factors contribute to this stagnant growth, including a decline in household incomes and higher inflation in recent years.
Additionally, the prevailing news regarding layoffs and declining profits in companies has led to increased uncertainty among the middle class regarding job security.
As a result, they are inclined to save more for potential contingencies, impacting their spending behavior.
Notably, consumption growth primarily stems from the affluent segment of society rather than the poorer sections. With their increased income, affluent individuals are directing their spending toward leisure activities such as holidays, travel, and hotels.
However, there is a positive indication for future consumption growth as there has been an upswing in production within the fast-moving consumer goods (FMCG) sector.
This development suggests a potential increase in consumption in the coming quarters.
India’s fiscal deficit has experienced a marginal decrease from 6.7% to 6.4% this year. The fiscal deficit represents the difference between the government’s income and expenditure.
In FY 2022-2023, the government has managed to keep the fiscal deficit at Rs. 17.3 trillion, which is lower than the revised estimate of Rs. 17.55 trillion released by the Controller General of Accounts (CGA).
This positive trend can be attributed to an increase in both tax and non-tax revenue of the government. For instance, GST collections have shown growth, rising from Rs. 1.68 trillion in April 2022 to Rs. 1.87 trillion in April 2023.
However, it is important to note that the fiscal deficit remains relatively high for a country like India. In 2013, the fiscal deficit stood at 4.5% of the GDP, but it has now escalated to 6.4%.
Therefore, it has become crucial for the government to prioritize measures aimed at reducing spending on unproductive sectors and schemes.
By doing so, the government can effectively work towards decreasing the country’s fiscal deficit and maintaining a more sustainable fiscal position.
This year’s economic growth is certainly significant; however, when compared to pre-pandemic levels, the real GDP stands only 10% above the levels seen in 2019-20.
In contrast, if we examine the three years preceding the pandemic, the growth rate was double the increase in output levels observed from 2016-17 to 2019-20.
One key concern is the relatively slower growth of consumption and private-sector investments.
These factors are interconnected, as higher investments lead to job creation and increased income, subsequently driving overall consumption demand in the economy.
Currently, government capital expenditure in heavy sectors has been instrumental in stimulating consumption and job growth. However, this approach may not be sustainable in the long run. As a result, consumption growth has begun to level off this year.
Furthermore, tight monetary conditions, low hiring in sectors such as IT and other services, the risk of unseasonal monsoons, and higher inflation, particularly in the services sector, could exacerbate this trend.
Despite the recent rise in GDP growth, concerns arise due to the looming threat of a global recession in FY2024. It may prove challenging for India to sustain its robust export growth and maintain strong consumption demand.
Financial experts are predicting India’s growth to fall within the range of 5.5-6.5% in the next financial year, primarily attributed to sluggish domestic consumption and a potential decrease in global demand resulting from the recession.
Notably, Germany has already entered a recession, followed by other Eurozone countries comprising 20 European nations.
Given these global economic uncertainties, the pertinent question arises regarding India’s ability to sustain its growth trajectory in the upcoming financial year.
Navigating through these challenges will require careful policy considerations, targeted measures to bolster domestic consumption, diversification of export markets, and proactive measures to mitigate the impact of global economic uncertainties.
By adopting a strategic approach and effectively managing these factors, India can strive to maintain a resilient growth path in the face of evolving global dynamics.