What are India’s Immediate Growth Prospects
Context:
- In February 2023, fresh information on the annual and quarterly national income for 2020–2021, 2021–2022, and 2022–2023 was released by the National Statistical Office (NSO). With the help of this new dataset, it is possible to assess the whole negative impact of COVID-19 on India’s GDP growth.
Recovery compared to the year prior to COVID:
- According to NSO’s second advance estimate, India saw a contraction of (−) 5.7% in 2020–21, which is much smaller than its (–) 7.7% first advance estimate (FAE) (SAE). Manufacturing, construction, and banking, real estate, etc., were the three industries that benefited the most from this modification.
- Real GDP increased from the previous estimate of 134.4 lakh crore to 136.9 lakh crore for this COVID-19 year. Since then, the GDP has increased by 7.5% in 2022–2023 and 9.1% in 2021–2022.
- Comparing the current real GDP level of 159.7 lakh crore with the period between 2019–20 and 2022–2023, the compound annual average growth rate (CAGR) was 3.2%. It should be emphasised that despite COVID-19’s effects, a number of countries, including China, Bangladesh, and Vietnam, saw positive economic development in 2020.
Alterations by industry:
- Despite the fact that the overall GVA in 2022−23 would increase by 11.3% from 2019–20, the mining and quarrying sector is still in contraction at (–) 0.3%. A meagre 4.3% increase is seen in all sectors, including commerce, hotel, and transportation.
- Construction, manufacturing, banking, real estate, and other industries all experienced higher-than-average growth, increasing by 18.6%. Agriculture and manufacturing followed with increases of 12% and 14.8%, respectively.
Gross Fixed Capital Formation (GFCF):
- Government final consumption expenditure (GFCE) increased by 7.4% while real GDP expanded by 10% in terms of overall spending. Both and demonstrate increases in private final consumption spending of 17.7% and 13.1%, respectively (PFCE).
- The nominal increase in the GFCF to GDP ratio from 2019–20 to 2022–2023 is from 28.6% to 29.2%. The corresponding real investment rates are 34% and 31.8%, respectively. Because capital goods experience different rates of inflation compared to GDP overall, real and nominal interest rates change.
Capacity utilisation and the ratio of incremental capital output (ICOR):
- The investment rate has so greatly increased in real terms. Hence, 8.5 instead of 4.9 was the predicted ICOR for 2019–20. This is because the GDP growth rate for 2019–20 was only 3.7%, which is rather low and suggests that there is a lot of untapped capacity.
- The average capacity utilisation ratio in the manufacturing sector fell from 75.2% in 2018–19 to just 70.3% in 2019–20. In the first half of 2022–2023, the capacity utilisation ratio is higher, standing at 73.5%. The gross fixed capital creation rate has risen both in real and nominal terms, but the muted expansion points to reduced capacity utilisation and a higher ICOR.
Forecasts for future growth:
- In Q3 of 2022–2023, real GDP growth was 4.4%, down from 6.3% in Q2 and 13.2% in Q1. Yet, the Central Bank of India’s previous estimates were in line with this decrease in growth. Growth of 5.1% in the fourth quarter is now required to achieve an annual increase of 7% in 2022-2023.
The Purchasing Managers’ Index, or PMI:
- This appears logical given that the majority of high frequency indicators result in greater economic activity. PMI manufacturing was higher than its long-term average of 53.7 in January and February 2023, at 55.4 and 55.3, respectively. PMI services increased from 57.2 in January 2023 to a nearly 12-year high of 59.4 in February 2023.
Index of industrial production (IIP) incorporating credit expansion:
- Core IIP climbed by 7.8% in January 2023, up from 7% in December 2022. Even still, loan growth, at 16.1% for the week ending February 10, 2023, was quite high. Yet, monthly credit data only reveals a notable rise in credit growth for personal loans. Industrial credit growth reached a seven-month low. Given that growth was subdued in the same quarter of the prior year at 4%, a bigger quarterly growth in Q4 appears possible due to a favourable base effect.
Repercussions for development:
- Given the anticipated global economic slowdown, India’s growth in 2023–2024 will likely be lower than the 7% growth it saw the year before. The RBI projects growth of 6.4% during 2023–2024. The International Monetary Fund (IMF), on the other hand, forecast a lower growth rate of 6.1%.
- If fiscal stimulus is sustained, primarily through capital expenditures as suggested in the 2023–24 Union budget, we might get closer to the RBI’s growth projection. But, considering that elections are soon, there may be pressure to increase revenue and spending. This can lead to a growth rate of around 6%.
Conclusion:
- In order to maintain India’s long-term outlook, all growth-stimulating policies should be put into action while following to the budget reduction strategy. Only if the fixed capital production rate is raised by an extra 2% over the longer term can a constant growth of 6% to 7% be ensured. This is true despite the depressing global circumstances.
