Economic growth questions: Some high-frequency indicators remain puzzling

Growth in GDP in the first quarter this financial year declined to a five-quarter low of 6.7 per cent

The latest Monthly Bulletin of the Reserve Bank of India (RBI) has noted high-frequency indicators suggest continued growth in demand, but at a slow momentum compared to the preceding quarters. While the central bank has retained its annual growth projection for the ongoing year at 7.2 per cent, prospects are being debated. As the Bulletin also noted, corporate results in the first quarter of 2024-25 showed a deceleration in real gross value added and corporations seem to be protecting margin with lower spending. Some of the large fast-moving consumer goods companies in recent days have expressed concern over slowing urban demand, which contributes to the bulk of their sales. Fortunately, rural demand seems to be growing and a good monsoon should help improve the outlook. Overall, the recent decline in the stock markets is also partly explained by weak corporate performance. 

Growth in gross domestic product (GDP) in the first quarter this financial year declined to a five-quarter low of 6.7 per cent, which was explained by lower government expenditure during the general elections. While the actual position will be known when the national accounts data for the second quarter is released, concern related to high-frequency indicators is not new. In fact, some economists have consistently highlighted the difference between various indicators and the actual growth outcomes. Some readings are indeed puzzling. In the auto sector, for instance, post-Covid, while the demand for passenger vehicles has recovered, sales of two-wheelers, often seen as an indicator of mass consumption and rural demand, have been sluggish. The number of two-wheelers sold in 2023-24 was about 15 per cent lower than the sales in 2018-19. The number of vehicles sold last financial year was also lower than that in 2018-19. 

Another concerning reading is the increase in the agricultural workforce. The basic understanding of development suggests that this number should go down as the economy grows and develops. The share of the workforce engaged in the agriculture sector has increased from 42.5 per cent in 2018-19 to 46.1 per cent in 2023-24. One explanation for these disconnects could be that recovery from the pandemic has largely been profit-driven, possibly with greater formalisation. Improvement in corporate profits has been reflected in the stock market rally over the past few years, though it may now be losing steam. An important criticism in this context has been that the use of company data in GDP estimation does not adequately reflect the state of the economy and tends to overestimate growth. Now that work has started on base revision, the government must address such concerns and criticism in the new series. 

Be that as it may, it is well accepted that growth in the post-pandemic period has been driven largely by government expenditure. The Union government’s capital expenditure increased from 1.67 per cent of GDP in 2019-20 to 3.2 per cent in 2023-24. Given other demands on the Budget, it would not be easy to keep increasing the outlay. It is thus important that the private sector starts investing, which does not seem to be happening in a big way. Based on the tax data, as economist R Kavita Rao noted last week on these pages, the increase in capital gains and other incomes could be indicating a shift in preference to financial investment among corporations rather than real investment. This certainly doesn’t augur well for higher sustainable growth. Only real investment and improved demand will sustain higher corporate earnings and GDP growth.