What is the current state of Indian economy?

The National Statistical Office (NSO) on Friday released the first advance estimates of National Income for 2021-22 to help the Union Finance Ministry in its annual budget making exercise. Finance Minister Nirmala Sitharaman will table the Union budget on February 1 at 11AM.

The autonomous body in its estimates compiled using the Benchmark-Indicator method said that the GDP may grow at 9.2% in the financial year ending March 2022. It is a tad less than the RBI projection, which had pegged the GDP growth rate at 9.5% for the current financial year. Meanwhile, China is expected to grow at 8%.

The estimates suggest that the Indian economy can come back to the level of FY20 in the absence of any strict lockdowns. However, the absolute growth in real GDP over FY20 would be a marginal 1.3%. This means that two years of growth had been lost to the pandemic. 

Nominal GDP is estimated to grow at 17.6% compared to a fall of 3% in FY21. It is better than the 14.4% growth used for FY22 Budget calculations last February. 

It means the government will have the benefit of a higher denominator as the annual fiscal deficit is looked at with respect to nominal GDP. A higher growth rate for nominal GDP than budgeted will have a dampening impact on the fiscal deficit as a percentage of GDP.  

Assuming that all revenues remain the same as estimated in the last Union Budget, the government can overshoot its absolute deficit number by some Rs 71,000 crore without any change to its fiscal deficit target of 6.8% of GDP.

However, the government is spending Rs 3.28 lakh crore over the Budget Estimate this fiscal. But given the buoyant tax revenues and expected savings from various departments, the government is in a comfortable position to rein in its fiscal deficit at 6.8%.

Ultimately, all of this hinges on the government garnering an estimated Rs 1 lakh crore with LIC’s IPO. 

Manufacturing is likely to expand at 12.5% while construction may rise to 10.7%.

Trade, hotel, transport and communication, despite showing a high at 11.9% this year, have still not made up for output lost since FY20. 

The bad news is in private consumption. Its share in GDP is still lower than what it was two years ago.

The share of consumer spending in FY22 GDP is projected to be 54.8%, compared with 56% in FY21 and 57.1% in FY20.

In absolute terms, it is estimated to rise 6.9% though it is still below pre-Covid levels seen in FY20. This indicates that in spite of strong recovery in 2021-22 from the contraction last fiscal year, consumption recovery is still not broad-based. Rising inflation does not bode well either. 

Meanwhile, investments have begun to pick up. According to the estimates, gross fixed capital formation’s contribution to real GDP is projected to be 32.9% in FY22, compared with 31.2% in FY21 and 32.5% in FY20.

Madan Sabnavis, chief economist, Bank of Baroda says that this could be challenging as private sector investment is down and states have been cautious in their capex given the uncertainty on their fiscal balances.

Sabnavis says that this number is susceptible to a major revision when the final estimates are released.

Government expenditure is seen growing 7.6% this fiscal.

While these numbers present an encouraging picture on the economic rebound, the effect of restrictions due to the increasing coronavirus caseload will be known better at the end of this month. That is when the first revised estimate of GDP for FY21 will be released. The release of second advance estimates of GDP for FY22 on February 28 may also lead to revision in growth rates.