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Seven percent annual growth and the realities in India

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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.

 

Reference

  1. https://www.thehindu.com/todays-paper/tp-opinion/india-7-plus-annual-growth-and-the-realities/article65859811.ece
  2. https://www.livemint.com/opinion/online-views/indias-fast-economic-expansion-will-take-deep-reforms-to-sustain-11661359537871.html
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