Can the Indian economy maintain its momentum?

Analysts were pleasantly surprised as the year saw high inflation, which forced the central bank to sharply raise interest rates, and increased uncertainty due to the war in Ukraine. The 7.2% growth in FY23 followed a 9.1% growth in FY22.

Several factors drove growth in the fourth quarter of the year. The full-year growth was led by agriculture, which posted a very strong year-on-year growth of 5.5% in the quarter. It looks like a bumper production in Madhya Pradesh may more than compensate for the crop loss due to excessive unseasonal rains in Punjab and Haryana.

Second, services exports were buoyant and net exports contributed 1.4 percentage points to the overall growth figure, helped by a 4.1% contraction in imports, which contributed positively to GDP growth.

Third, production of both passenger and commercial vehicles increased smartly, recovering from the chip shortage crisis. Fourth, there has been a rapid recovery in air and rail traffic, led by a reduction in travel demand after the lockdown.

Fifth, the government’s sustained capex push in the Union Budget boosted the production of construction-related sectors such as steel and cement. Estimates suggest that gross fixed capital formation, an indicator of investment demand in the economy, increased by 8.9% during the fourth quarter.

Sixth, financial services did well with the revival of bank credit post-Covid. In fact services, construction, trade, hotels, finance and real estate all grew faster than anticipated demand. Seventh, a sharp fall in crude oil prices (running below $73 a barrel) boosted economic activity.

Lastly, the growth figures were undoubtedly helped by a less statistical underpinning from the peak Covid-19 year. Experts have also attributed the boom in part to favorable methodological issues – such as the Central Statistical Organization’s (CSO) use of single deflation rather than double deflation, which they believe affects oil prices. An increase in growth is anticipated at the time of decline. , (While output and inputs that go into production deflate with their respective prices in other countries, in India, due to the lack of price indices, both are deflated with only the output deflator, which measures the sharp price rise.) produces a bias in the timing movements.)

But these issues should not make us overly suspicious for two reasons: One, the methodology, with all its shortcomings, is followed consistently by the CSO. Second, the estimates are provisional and will be refined by the CSO over the next two years as per its policy.

Finally, while the economy has recovered from the shock of Covid-19, the main concern now is whether the rapid growth is sustainable. Most economists forecast a slowdown in momentum in FY24. That’s because the red flag dampening the good news for the fourth quarter is a slower 2.8% year-on-year growth in private consumption, which could be a sign of a slowdown in response to RBI’s monetary tightening.

However, it is still early days, and the revision of this figure will have to be watched. This is important because private consumption will ultimately determine private investment growth, which is important for job creation.

Emerging global economic conditions will continue to be an important determinant, along with monsoon and other climate-related factors. But it may not be understood that the biggest impact may come from policy responses. Sound policies will help the economy maintain its momentum.

The released growth estimates (subject to revision, as already mentioned) confirm that Covid-19 dealt a major blow to the economy. The compound annual growth rate (CAGR) from 2019 to 2023 is just 2.7%.

The impact of the lockdown policy can also be seen from the estimates. Growth in agriculture (3.5%) outpaced manufacturing (2.4%) during this period as the lockdown covered factories but not farms. Given the implications for job creation and consumption demand, higher-quality GDP growth would have been possible if manufacturing GDP had performed as well as agriculture.

FY23 manufacturing growth is estimated at 1.3%. Revival of this sector must be the immediate focus of policy makers if India’s impressive economic growth momentum is to be sustained.

Updated: June 05, 2023, 02:47 PM IST