The growth challenge

Higher growth next year would require policy work

The national income data, released by the National Statistical Office (NSO) on Tuesday, was awaited for a variety of reasons. It had the gross domestic product (GDP) estimates for the third quarter (October-December 2022) of this fiscal year. The headline year-on-year (YoY) growth numbers for the first two quarters of this fiscal year were influenced by a weak base as economic recovery in the first half of 2021-22 was constrained by the second wave of the pandemic. Thus, the third-quarter number was expected to indicate the real strength of the economy. Most analysts expected the headline growth number to be lower than the first and second quarters. As the NSO numbers showed, the economy expanded by 4.4 per cent during the quarter, which was in line with the Reserve Bank of India’s (RBI’s) projection.

Besides, the data release had the second advance estimates of national income for 2022-23, which pegged GDP growth at 7 per cent. Additionally, the growth numbers for previous years were revised upwards. For instance, full-year growth for 2021-22 was revised to 9.1 per cent, compared to the previous estimate of 8.8 per cent. Growth for 2020-21 was revised to (-) 5.8 per cent compared to the earlier estimate of (-) 6.6 per cent. This suggests that the level of contraction in the Covid year was lower than the previous estimates and recovery in the following year was stronger. Among the sectors, agriculture, forestry and fishing, which did well during the pandemic, is estimated to have grown by 3.7 per cent in the third quarter, compared to 2.3 per cent in the same quarter last year. The manufacturing sector, which is vital for job creation, is estimated to have contracted by 1.1 per cent during the quarter, compared to growth of 1.3 per cent in the comparable quarter last year. Meanwhile, private consumption growth during the quarter moderated to 2.1 per cent, which is worrying. Gross fixed capital formation, however, went up 8.3 per cent, which is encouraging, but growth may fizzle out in the absence of consumption support.
 

Now that the second advance estimates have kept the growth rate in 2022-23 unchanged at 7 per cent, which is partly being pushed up by the weak base of last fiscal year, what would the growth picture look like in 2023-24? The Union Budget assumed a nominal growth rate of 10.5 per cent. The Economic Survey had projected a growth rate of 6-6.8 per cent. Given that the Indian economy is projected to grow well below 5 per cent in the second half of the current fiscal year, attaining a growth rate significantly above 6 per cent in 2023-24 would require effort because of the constraining environment. The global economy is expected to do better in 2023 than what earlier estimates showed, but it would still slow significantly. The recent upside surprise on the inflation front suggests more work would be required on the part of the RBI, which means the policy rate can be raised further and may remain at higher levels for a longer period. On the fiscal front, the government is already supporting the economy with higher capital expenditure and would find it difficult to spend more. Policymakers would do well to keep these factors in mind while designing interventions in the coming fiscal year.