UPSC Daily Editorial Analysis | India, 7% plus annual growth, and the realities | GDP Growth Estimate | 07th September 2022

What is the article about?

• The article discusses the quantitative current state of the Indian economy and what has to be done to fulfil India's ambition to become a developed country.

Relevance:

• GSII: Indian Economy and Essay Paper

Analysis:

• The Present Status of the Indian Economy:
  • 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 ₹35.5 lakh crore in 1Q of 2019-20, real GDP at ₹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.
  • Given our desire to achieve developed country status in the next 25 years, the required growth rate is in the range of 8% to 9%. In 2023-24, we must try to achieve a growth rate of 6% to 7%.
• 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%), and 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. A more relevant comparison would be to look at the increase with respect to corresponding output levels in the pre-COVID-19 normal year, that is in 1Q of 2019-20.
  • In this comparison, manufacturing seems to have done better with an increase of 7% in 1Q of 2022-23 while the trade, hotels, transport et al. sector has remained below its pre-COVID-19 level by a margin of minus 15.5%. This was the main contact-intensive sector which suffered the most during COVID-19 and which may show better recovery in succeeding quarters.
  • Construction has also increased by a small margin of 1.2% when compared to its 1Q 2019-20 level.
• 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.
  • Recovery in domestic demand has been reflected in the growth rates of private final consumption expenditure (PFCE), at 25.9%, and gross fixed capital formation (GFCF) at 20.1% over the corresponding quarter of the previous year. As compared to its 1Q 2019-20 level, the GFCF showed a growth of 6.7%.
  • 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.
• Exports-Imports:
  • 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.
  • It is likely that import growth will continue to exceed export growth in the next few quarters, both in real and nominal terms, considering prevailing high global prices of petroleum products and other intermediate inputs and India’s growing demand for importing intermediate goods with a view to boosting ‘Make in India’.
• What should be done?
  • 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.
  • Two important areas of policy support for this purpose would be to
    • further increase the investment rate and
    • to reduce the magnitude of negative contribution of net exports.
  • As seen in 1Q of 2022-23, 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.
    With buoyant tax revenue growth, fiscal policy may strongly support GDP growth without making any significant sacrifice on the budgeted fiscal deficit target.
  • Raise investment rate: The key to growth lies in raising the investment rate. Public capital expenditure has shown a rise. In crisis years, it is particularly good.
  • It can crowd in private capital expenditure. But this cannot be normal. Private capital expenditures, both corporate and non-corporate, must rise.
• Way Forward:
  • The international environment for growth is bleak. Developed countries even fear a recession. 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.