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BW Businessworld

Inside India's 13.5% Economic Growth

The 13.5 per cent growth is far below the estimates for the quarter that were projected due to the global uncertainty, experts noted

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The news of India’s 13.5 per cent gross and domestic product (GDP) growth in the April-June period this fiscal certainly gave a sigh of relief to Prime Minister Narendra Modi-led central government and then the country also overtook the United Kingdom (UK) to become the fifth largest economy in the world — which also paved the way for Bharat’s dream to establish itself as an economic superpower.

Notably, the official data showed that the 13.5 per cent growth is the fastest in the last four quarters — on account of better performance by the services and agriculture sectors. However, the concern remains that this will lose momentum in coming quarters as higher interest rates cool economic activity.

The State Bank of India in a report said that the headline GDP hides more things than it reveals and it is high time to seriously introspect on the measurement of the index of industrial production (IIP) and consumer price index (CPI) basket and it projected GDP growth for the financial year (FY) 2023 at 6.8 per cent.

The report, however, mentioned that India is set to become the third largest economy in the world by 2029. The share of India’s GDP is now at 3.5 per cent, as against 2.6 per cent in 2014 and is likely to cross 4 per cent in 2027, the current share of Germany in global GDP. 

The path taken by India since 2014 reveals India is likely to get the tag of the third largest economy in 2029, a movement of 7 places upwards since 2014 when India was ranked 10th. India should surpass Germany in 2027 and most likely Japan by 2029 at the current rate of growth, the report stated. 

To dive beyond the milestone number, BW Businessworld spoke with several economists to know what is next after India's 13.5 per cent economic growth during a time of geopolitical crisis in Europe, high inflation and fear of a possible recession.

“The 13.5 per cent is a YoY number is rather cosmetic, given that the Q1 of last year was relatively depressed due to a wave of Covid-19. A better way to look at the economy is to look at the quarter-to-quarter growth and this reveals a starkly different picture. On a QoQ basis, real GDP is down 10 per cent. Further, it must be noted that the Q1 number was lower than most market expectations and even the RBI’s. I think this will lead the RBI to revise down its 7.2 per cent GDP expectations for the year,” said Indranil Pan, Chief Economist, Yes Bank.

Also, several reports and leading economists have already predicted that 13.5 per cent growth will definitely lose momentum as the pace of growth remains weak. At this point, the growth in private consumption expenditure is a point of concern. 

Though there were some signs of recovery, private consumption expenditure was still lower by 2 per cent from the previous quarter. Also, private consumption expenditure was just 6 per cent higher than Q4 FY20, a quarter that was not affected by the pandemic.

However, Vivek Iyer, Partner and National Leader, Financial Services Risk believes that the growth won’t lose momentum in the coming quarters. “Growth rates won't be the numbers that we have seen in the past. We probably need to get adjusted to a growth rate of 5 per cent to 6 per cent in the long term, as that seems to be more sustainable. Directionally the country is on the right path and a sustainable balanced growth rate number should help us steadily stay on course,” he said.

The challenges

Talking about if headline GDP hides more things than it reveals, Yes Bank’s Pan finds this a very tricky issue to answer. He said that it is not unknown that the GDP captures mostly the organised segment of the economy and the representation of the unorganised sector of the economy is relatively low. 

Experts also believe that this is even after the implementation of the demonetisation and the goods and services tax (GST), which was largely expected to have pushed the economy towards formalisation. Thus, at the current stage of the business cycle, major assistance is needed from the government to stabilise the economy. 

The GDP (at constant price) in Q1 of FY-2023 has increased to Rs 36.85 trillion as against Rs 35.60 trillion in Q1 of FY-2020 registering a growth of 3.5 per cent in 3 years. More so, the growth of 13.5 per cent in Q1 of FY-2023 is below the RBI estimate of 16.2 per cent. 

“Considering these facts, there are several challenges in achieving the annual growth rate of GDP at 6.5-7 per cent, as projected by the RBI and several experts. High inflation, rising trade deficit and a falling rupee have enlarged the risk. Small businesses have been badly hit in the past two years causing a fall in labour participation ratio (LPR) and employment,” said R P Gupta, Economist and Author.

Gupta said that with the lower growth rate, there is a great challenge to resolve the falling LPR and employment problem; that needs a top priority. As an interim relief to the poor class, higher social spending is needed till India resolves the job crisis. However, that might impact government investment. Unfortunately, private investment is not so encouraging.

Also, a recent study by the Reserve Bank of India (RBI) also indicated that the outlay for fresh projects in FY23 is lower than the pre-pandemic levels. Thus, even as capital formation seems robust (at 20 per cent YoY growth in Q1FY23), it is likely to be mostly the government capex expenditure. 

This also underscores the heightened role of the government sector in the growth dynamics of India, despite schemes such as the production-linked incentive (PLI) scheme that is likely to have boosted the private manufacturing sector.

“The big drag that was there in Q1FY23 and is likely to continue is on account of the net trade. The indicator from the trade data is that exports are slowing – undoubtedly an expected consequence of the global slowdown. However, imports are not slowing down as much, implying that the trade deficit remains wide. This implies that net trade would maintain a downward pull for real GDP growth,” said Pan.

What next after a 13.5 per cent growth

To move forward, India will have to use all policy tools to bring back the high growth track to achieve growth above 7 per cent and create new jobs. This needs a composite plan instead of piecemeal steps, experts noted while talking to BW Businessworld.

“The micro, small and medium enterprises (MSME) sector, particularly the unorganised sector, requires special attention for resolving the job crisis. Farmer’s income must be boosted by all means. These two sectors contribute about 80 per cent to 85 per cent of jobs. Those need policy, monetary and fiscal support,” said Gupta.

“To achieve the desired growth rate, the private investment must be boosted through an easement of business and taxation laws. Structural reforms and financial innovations are the need of the hour. Exports must be boosted through export incentives in a calibrated manner till India succeeds in reducing the cost of basic inputs such as energy, logistics, capital, minerals etc. Investment and export-led growth is the right choice over consumption-led growth,” said Gupta.

Pan said that the Indian economy remains weak and due to Covid-19 there may not have yet been any rectification the same. The point that I am trying to make is that the potential GDP for India may not be much higher than 6 per cent at this moment. 

“While the government has been attempting a lot of measures to push the manufacturing sector, I am not sure how much success we have yet achieved in this area, especially with respect to job creation. Thus, job creation forms one of the important areas that the government needs to look at if it has to push towards sustainable growth of 6.5 per cent and above,” Pan added.

Talking about the road ahead, Iyer thinks that it’s a wait, watch and respond approach. Things are evolving so dynamically in the external environment. They will need to be continuously improvised based on new realities. Having said that, India seems to be on a growth path — the only request is to let us not get too focused on the numbers and continue to focus on the direction.

According to economists, the other problem for the economy is the inequitable distribution of wealth and incomes. This is another area that the Modi government needs to focus and work on, especially as a universal basic income scheme may not be feasible due to the lack of fiscal space. 

Instead of self-satisfaction, India must acknowledge the problems in the economy and act accordingly. India has the capability to resolve these problems. However, unity and team spirit are the key prerequisites, they said.