What are India’s immediate growth prospects?

Last Updated16/03/2023

National Statistical Office (NSO), recently released a set of new numbers pertaining to annual and quarterly national income for 2020-21, 2021-22, and 2022-23.
This new dataset provides an opportunity to make a final assessment of COVID-19’s adverse impact on India’s GDP growth.

As per NSO’s second advance estimate (SAE), India suffered a contraction of (-) 5.7% in 2020-21 which is much lower than its first advance estimate (FAE) at (-) 7.7%.
The three sectors which benefited the most were manufacturing, construction, and financial, real estate.
Real GDP during this COVID-19 year amounted to ₹136.9 lakh crore, higher than the ₹134.4 lakh crore assessed earlier. Since then, GDP grew by 9.1% in 2021-22 and 7% in 2022-23.
Comparing the current real GDP level at ₹159.7 lakh crore, the compound annual average growth rate (CAGR) between 2019-20 and 2022-23 was 3.2%.

Sector-wise, while overall GVA in 2022-23 is higher by 11.3% as compared to 2019-20.
Mining and quarrying — still shows a contraction at (-) 0.3%. Trade, hotels, transport et al also show a weak growth of 4.3%.
Sectors with higher-than-average increase:
Construction at 18.6%,
Manufacturing at 14.8%,
Financial, real estate at 14.3%
Agriculture at 12%.

From the viewpoint of aggregate expenditure, overall increase in real GDP is 10% with government final consumption expenditure (GFCE) growing at 7.4%. and private final consumption expenditure (PFCE) show an increase of 17.7% and 13.1%, respectively.
The GFCF to GDP ratio in nominal terms is 29.2% in 2022-23 as compared to 28.6% in 2019-20.
The corresponding real investment rates are 34% and 31.8%, respectively.
The difference in real and nominal rates is due to the differential inflation rates of capital goods vis-à-vis overall GDP.

In real terms, there is more improvement in the investment rate.
Accordingly, the estimated ICOR was at 8.5 in 2019-20 as compared to 4.9 in 2022-23.
This is because the 2019-20 GDP growth rate was rather low at 3.7% reflecting considerable unutilised capacity.
The average capacity utilisation ratio in the manufacturing sector was only 70.3% in 2019-20, having fallen from 75.2% in 2018-19.
In the first half of 2022-23, the capacity utilisation ratio is higher at 73.5%.
While the gross fixed capital formation rate has picked up whether measured in real or nominal terms, the subdued growth implies a lower capacity utilisation and a higher ICOR.

Real GDP Growth:
Q3 of 2022-23: 4.4%
Q2 of 2022-23:6.3%
Q1 of 2022-23: 13.2%.
This decline in growth rate is in line with the projections made by the Reserve Bank of India earlier.
It would now require a growth of 5.1% in Q4 to enable reaching an annual growth of 7% in 2022-23.

Most high frequency indicators point towards an improved economic activity.
PMI manufacturing in January and February 2023 at 55.4 and 55.3, respectively, remained above its long-term average at 53.7.
PMI services increased from 57.2 in January 2023 to a near 12-year high of 59.4 in February 2023.

Given the anticipated global economic slowdown, India’s 2023-24 growth is likely to remain lower than the growth rate of its preceding year of 7%.
The RBI has projected a growth of 6.4% for 2023-24.
The International Monetary Fund (IMF), on the other hand, has projected a lower growth of 6.1%.

Any stimulus for growth should be undertaken while adhering to the fiscal consolidation road map so as to keep India’s medium-term story intact.
A steady growth of 6% to 7% can be ensured over the medium term, only if the fixed capital formation rate is raised by another 2 percentage points.
This is notwithstanding the global factors that are not encouraging.