The news of India’s gross and domestic product (GDP) growing by 13.5% in the April-June period, this fiscal year has certainly given a sigh of relief to the central government led by Prime Minister Narendra Modi. , 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 of establishing itself as an economic superpower.
Notably, official data showed that the 13.5% growth is the fastest over the past four quarters, due to better performance in the services and agriculture sectors. However, there are still fears that this will lose momentum in the coming quarters as rising interest rates dampen economic activity.
The State Bank of India said in a report that overall GDP hides more than it reveals and that it is high time to seriously question the measure of the industrial production index basket (CPI) and Consumer Price Index (CPI) and projected GDP growth for fiscal year (FY) 2023 at 6.8%.
The report, however, mentions that India is expected to become the third largest economy in the world by 2029. India’s share of GDP is now 3.5%, up from 2.6% in 2014 and expected to exceed 4% in 2029. 2027, the current share of Germany in world GDP.
India’s path since 2014 reveals that India is likely to become the third largest economy in 2029, a move up 7 places from 2014 when India was ranked 10th. India is expected to overtake Germany in 2027 and most likely Japan by 2029 at the current growth rate, the report says.
To dive beyond the landmark figure, BW Businessworld spoke to several economists to find out what’s next after India’s 13.5% economic growth amid geopolitical crisis in Europe, high inflation and fear of a possible recession.
“The 13.5% is a rather cosmetic annual figure, given that the first quarter of last year was relatively depressed due to a wave of Covid-19. A better way to look at the economy is to look growth quarter over quarter and that reveals a drastically different picture.On a quarterly basis, real GDP is down 10%.Also, it should be noted that the Q1 figure was lower than the most market expectations and even those of the RBI. I think this will lead the RBI to revise down its GDP forecast by 7.2% for the year,” said Indranil Pan, Chief Economist, Yes Bank.
Moreover, several leading reports and economists have already predicted that the 13.5% growth will definitely lose momentum as the pace of growth remains weak. At this point, growth in private consumer spending is a concern.
Although there were some signs of recovery, private consumption spending was still 2 percent lower than the previous quarter. Additionally, private consumer spending was only 6% higher than in the fourth quarter of FY20, a quarter that was unaffected by the pandemic.
However, Vivek Iyer, partner and national leader, Financial Services Risk, believes that growth will not falter in the coming quarters. “The growth rates will not be the numbers we have seen in the past. We probably need to adjust to a 5-6% growth rate in the long term, because that seems to be more sustainable. From a directional perspective, the country is on the right track and a balanced and sustainable growth rate should help us to steadily stay on course,” he said.
Speaking of whether aggregate GDP hides more than it reveals, Yes Bank’s Pan finds this to be a very tricky question to answer. He said it is not unheard of that GDP mainly captures the organized segment of the economy and the representation of the unorganized sector of the economy is relatively low.
Experts also believe that this is even after the implementation of demonetization and the Goods and Services Tax (GST), which was widely believed to have pushed the economy towards formalization. Thus, at the current stage of the economic cycle, major assistance is needed from the government to stabilize the economy.
GDP (constant price) in the first quarter of FY2023 increased to 36.85 trillion rupees from 35.60 trillion rupees in the first quarter of FY2020, registering a growth of 3.5% in 3 year. More so, the 13.5% growth in the first quarter of FY2023 is below the RBI’s estimate of 16.2%.
“Given these facts, there are several challenges ahead to achieve the annual GDP growth rate at 6.5-7% as projected by the RBI and several experts. High inflation, growing trade deficit and a falling rupee have increased the risk.Small businesses have been hit hard over the past couple of years leading to lower labor participation rate (LPR) and employment,” said RP Gupta, economist and author.
Gupta said that with the lower growth rate, there is a big challenge to solve the problem of declining LPR and employment; which needs top priority. As temporary relief for the poor class, higher social spending is needed until India resolves the jobs crisis. However, this could have an impact on public investments. Unfortunately, private investment is not so encouraging.
Furthermore, a recent study by the Reserve Bank of India (RBI) also indicated that spending on new projects in FY23 is below pre-pandemic levels. So while capital formation looks robust (with 20% year-on-year growth in the first quarter of FY23), it’s likely to be mostly government investment spending.
This also underscores the increased role of the public sector in India’s growth momentum, despite programs such as the Production Linked Incentives (PLI) program which have likely boosted the private manufacturing sector.
“The big drag that was there in the first quarter of FY23 and is expected to continue is net trade. The trade data indicator is that exports are slowing – no doubt an expected consequence of the global slowdown. However , imports are slowing less, implying that the trade deficit remains large. This implies that net trade would maintain a downward trend for real GDP growth,” Pan said.
And after a growth of 13.5%
Moving forward, India will need to use all policy tools to bring back the high growth path to achieve above 7% growth and create new jobs. This requires a composite plan instead of piecemeal steps, experts noted in an interview with BW Businessworld.
“The micro, small and medium enterprise (MSME) sector, especially the unorganized sector, needs special attention to address the jobs crisis. Farmers’ income must be increased by all means. These two sectors account for approximately 80 to 85% of jobs. These need political, monetary and fiscal support,” Gupta said.
“To achieve the desired growth rate, private investment must be stimulated by a relaxation of business law and taxation. Structural reforms and financial innovations are the need of the hour. Exports need to be boosted by export incentives in a calibrated manner until India succeeds in reducing the cost of basic inputs such as energy, logistics, capital, minerals, etc. Gupta.
Pan said India’s economy remains weak and due to Covid-19 there may not have been a similar rectification yet. What I’m trying to make is that India’s potential GDP may not be much higher than 6% right now.
“Although the government has tried many measures to stimulate the manufacturing sector, I am not sure how much success we have yet had in this area, especially in terms of job creation. Thus, job creation is one of the important areas that the government must address if it is to aim for sustainable growth of 6.5% and above,” added Mr. Pan.
Speaking of the road ahead, Iyer thinks it’s a wait-and-watch-and-respond approach. Things are changing so dynamically in the external environment. They will have to be continually improvised according to new realities. That said, India seems to be on a growth path – the only request is to not focus too much on the numbers and keep focusing on the direction.
According to economists, the other problem for the economy is the inequitable distribution of wealth and income. This is another area for the Modi government to focus on and work on, especially since a universal basic income scheme may not be feasible due to lack of fiscal space.
Instead of complacency, India must recognize the problems in the economy and act accordingly. India has the capacity to solve these problems. However, unity and team spirit are the essential prerequisites, they said.