Robust performance

Sustaining growth would be challenging

India’s economic performance in 2022-23 has surprised the Street. The numbers released by the National Statistical Office on Wednesday showed India’s gross domestic product (GDP) expanded by 7.2 per cent in 2022-23, compared to the advance estimate of 7 per cent. The better than expected final growth number was largely driven by the fourth quarter of the fiscal year, which recorded a growth rate of 6.1 per cent. At the disaggregated level, the agriculture sector expanded 4 per cent, while manufacturing registered a growth rate of just 1.3 per cent during the fiscal year. The clear outperformer was the trade, hotels, transport, and communication and services related to the broadcasting segment, which registered a growth rate of 14 per cent, while the financial, real estate, and professional services segment expanded 7.1 per cent.

Since the full-year number was somewhat skewed by higher growth witnessed in the first half of the year because of a relatively weak base, it’s worth looking at the second half of the year to gauge how the economy will perform in the current year. While overall growth looks strong in the fourth quarter, growth in private final consumption expenditure was below 3 per cent, which could remain a drag. However, on the positive side, investment was up. The Reserve Bank of India (RBI) expects the Indian economy to expand 6.5 per cent this fiscal year. While the projection is significantly lower than in 2022-23, attaining even this level of growth would not be easy because of a variety of factors. It is worth noting that growth in the second half of last fiscal year was just about 5.3 per cent as the base effect of the pandemic waned.

The economy thus would have to grow at a much faster pace. This would partly be challenging because of weaker global growth. Interest rates in India have also increased significantly over last fiscal year and are likely to remain elevated for some time. The RBI expects an average inflation rate of 5.2 per cent in the current fiscal year. Since it would still be significantly higher than the target of 4 per cent, the scope for monetary easing wouldn’t be available. According to an analysis presented in the latest RBI Annual Report, a 1 percentage point increase in the policy rate leads to a 30 basis point fall in GDP growth in the third quarter, and the impact lasts up to eight quarters. 

Growth outcomes and the durability of a reasonably higher rate will, to a large extent, depend on the sustained pickup in investment. Growth was supported by government capital expenditure. Given that nominal growth is expected to come down from over 16 per cent in 2022-23, there could be risks to projected capital expenditure if the fiscal deficit is to be contained at the budgeted level of 5.9 per cent of GDP, which will be important. The government, in fact, has done well to attain the fiscal deficit target for 2022-23 as the latest numbers, also released Wednesday, showed. A pickup in private investment thus would be crucial. Growth in bank credit is an important indicator in this context. As of March 2023, bank credit was growing roughly at the same pace as nominal GDP. Although bank balance sheets have improved significantly and are in a position to support corporate investment, a durable increase will depend on the reading of the economic outlook by corporations. As things stand today, although economic uncertainty has ebbed considerably, challenges remain.