GDP grows 13.5% in Q1, less than RBI prediction

India’s GDP grew at 13.5% in the quarter ending June 2022, much lower than the 16.2% forecast by the Reserve Bank of India’s Monetary Policy Committee (MPC) and the 15.5% projection by a Bloomberg poll of economists.

India’s GDP grew at 13.5% in the quarter ending June 2022, much lower than the 16.2% forecast by the Reserve Bank of India’s Monetary Policy Committee (MPC) and the 15.5% projection by a Bloomberg poll of economists. Having surprised significantly on the downside, the latest GDP numbers raise questions about the economy’s growth prospects this fiscal — the RBI expects GDP growth for 2022-23 to be 7.2% — and perhaps also the rationale of policy pivot towards inflation management instead of supporting growth.

(PTI)

In a press conference after the numbers were released, finance secretary T V Somanathan said the Indian economy is still on course for 7-7.5% growth on the back of robust capital expenditure and private consumption. “With 13.5% growth rate, GDP has recovered the pre-pandemic output and gone beyond by near 4%,” he said.

But experts believe that unless fiscal policy takes a more proactive role in supporting mass demand and smaller enterprises, that may be challenging.

According to data released by the National Statistical Office (NSO), GDP growth in the April-June quarter stood at 13.5% on a year-on-year basis. While the headline number looks impressive, it is much lower than expected, and needs to be seen in the context of a strong base effect. Because economic activity was severely disrupted during the June 2020 and June 2021 quarters due to the first lockdown and the second wave of the pandemic, GDP levels in these two periods were below pre-pandemic levels (June 2019 quarter). When compared to the pre-pandemic level of quarter ending June 2019, the June 2022 GDP shows a growth of just 3.8%.

A sector-wise analysis of the numbers suggests that informal sector enterprises in the service sector continue to be the weakest link in post-pandemic economic recovery. While the year-on-year growth number of service sector is 17.6%, it is just 3% compared to the pre-pandemic value (quarter ending June 2019). For the trade, hotels, transport, communication and broadcasting services subsector — this has the largest share of service sector employment in the economy — the Gross Value Added (GVA) component continues to stay 15% lower than its pre-pandemic levels. Construction, another employment intensive component of the non-farm economy, has managed to grow at just 1% over its pre-pandemic value.

The analysis from the expenditure side is slightly more complicated than what the sector-wise GVA numbers suggest. One of the biggest headwinds to growth has come from government spending, with Government Final Consumption Expenditure (GFCE) growing at just 1.3% on a year on year basis. While this figure is 9.6% higher than the pre-pandemic value, it is 3.5% lower than what it was in the quarter ending June 2020. These numbers suggest that the withdrawal of fiscal stimulus might have generated headwinds for overall growth. While Private Final Consumption Expenditure (PFCE) has shown a healthy growth of 25.9% — it is now 9.9% more than the pre-pandemic value — it is likely that the consumption revival is being led by the rich rather than the mass demand. The fact that RBI’s Consumer Confidence Indices continued to remain in red and rural wage growth has stayed tepid during this period supports this line of reasoning.

“The latest GDP numbers clearly show that the economy is getting entrenched in the pattern of K-shaped recovery where the rich are driving growth and the poor struggle to achieve even subsistence levels. High inflation especially for prices of essentials has only made matters worse. There is every reason to believe that these numbers will be revised downwards. With the government itself expecting a reduction in agricultural output in the Rabi season, a 4.5% growth in agriculture without any base effect is extremely unlikely,” said Himanshu, an associate professor of economics at Jawaharlal Nehru University. “Unless fiscal policy takes a pro-active role in supporting mass incomes, we are looking at long-term damage to our growth potential,” he added.

But Somanathan pointed to rising private investment and private consumption. “The gross fixed capital formation (GFCF) as a percentage of GDP (at 2011-12 prices) stood at 34.7%, highest in Q1 of past 10 years supported by various reforms and measures taken by the government leading to the reinvigoration of the capex cycle and crowding-in of private investment,” he said.

And private final consumption expenditure (PFCE) has also revived and its share in GDP (at 2011-12 prices) stood at 59.9% in the quarter, the highest in any corresponding quarter in the past 10 years supported by various measures undertaken by the government to boost consumption in the last two years, he added, pointing out that robust high frequency indicators in July and August suggest sustained growth in the second quarter.

Still, given the fact that most forecasts, including that by the RBI’s MPC, expect growth rates to moderate going forward, the lower than expected growth in the June 2022 quarter is cause for concern. “Post-pandemic tailwinds essentially lifted the GDP in Q1 FY23 — even if we were to discount the low base, this marks a stellar rise in sequential momentum. This marks a confluence of tailwinds, such as the catch-up in contact-intensive services, public capex push, and lagged impact of easy financial conditions. Looking forward though, some of these will be replaced as headwinds, as deteriorating global growth prospects, higher inflation impacting consumption, and gradually tightening financial conditions eventually start to impact the pace of growth momentum as the year progresses,” Aurodeep Nandi, India Economist and Vice President at Nomura said in a note.