Sustained momentum

Private consumption remains a weak spot

The recovery in the Indian economy from the pandemic has been stronger than expected. After registering a growth rate of 9.7 in 2021-22 and 7 per cent in 2022-23, the Indian economy, according to the second advance estimates of the National Statistical Office (NSO), is expected to grow at 7.6 per cent in 2023-24. The NSO in its first advance estimates had projected a growth rate of 7.3 per cent for the current year. This means that the economy would grow at or above 7 per cent for the third consecutive year, which should be considered a significant achievement, given the global economic environment has not been exactly favourable. Advanced economies, for instance, are still dealing with high inflation, though the rate has come down, which has resulted in a significant tightening of global financial conditions.

Among the drivers of growth, manufacturing and construction are expected to grow 8.5 per cent and 10.7 per cent, respectively, this financial year. Growth in agriculture and allied activities is expected to remain subdued at 0.7 per cent compared to 4.7 per cent in the previous year. Along with the second advance estimates for the ongoing year, the NSO also released the revised numbers for previous years and estimates for the third quarter of the current year. The growth estimate for 2022-23 has been revised lower, which to some extent helped growth in the current year. Meanwhile, the economy expanded at a robust rate of 8.4 per cent in the third quarter (October-December), with double-digit growth in the manufacturing sector. After the revisions, growth in the first three quarters this financial year stood at 8.2 per cent, which suggests the momentum is expected to weaken in the ongoing quarter.

While the Indian economy is estimated to have grown at a robust pace for three consecutive years, which will give enormous confidence to the Bharatiya Janata Party, the ruling party that will soon be seeking re-election to office, it is worth debating if the momentum can be sustained. The Reserve Bank of India expects the economy to grow at 7 per cent in 2024-25. To be fair, a lot will depend on the shape of the new government and its priorities. Nonetheless, the national accounts point to one big inherent weakness. Private final consumption expenditure in the first nine months of the year is estimated to have grown just about 3.7 per cent at constant prices, significantly lower than the headline growth number. Although capital formation has grown over 10 per cent, the private sector would be reluctant to increase capacity if private consumption remains weak.

While the government has focused on capital expenditure to revive growth in recent years, it’s important for the private-sector investment cycle to revive in a sustainable manner to keep up the growth momentum, which would, to an extent, depend on consumption growth. Higher growth in tax collection, though, would give some room to the government to sustain investment. Both corporation and income tax collection, for instance, went up by over 20 per cent in the first 10 months of the year. On the global front, apart from geopolitical risks, the broader economic environment is expected to be less unsettling than it has been in recent years. In terms of monetary policy, the robust headline growth numbers and its own projections for the next financial year should allow the Monetary Policy Committee to focus on inflation management without worrying much about growth.