India seems to be on course to a GDP growth of about 7% this fiscal year. But the journey won’t be easy

Last month, the Reserve Bank of India (RBI) pegged the country’s Gross Domestic Product (GDP) growth for the quar ter ending September at 6.1-6.3%. “If this is realised, India is on course for a growth rate of about 7 per cent in 2022-23,” the central bank stated in its monthly bulletin. Earlier this week, the National Statistical Office (NSO) released the Q2 data. And the numbers were on expected lines.

The GDP at constant (2011-12) prices for the quarter is estimated to be Rs 38.17 lakh crore — a growth of 6.3% over the same quarter last year. The Indian economy has certainly slowed when compared with the 13.5% growth of Q1, which was helped by a favourable base effect as growth had weakened in the corresponding Delta wave-hit quarter of 2021-22. For the first six months of the current fiscal year, for which we have data, India grew at 9.7%. From hereon the GDP journey will be judged on merit alone, as there will be no statistical brownie points accruing from a low base.


How will India’s GDP growth fare at a time when the global economy is clouded by “sharper-than-expected slowdown”, a phrase used by the International Monetary Fund (IMF) when it revised its economic outlook downward in October? The broad consensus among economists is that India may clock a GDP growth rate of almost 7% this fiscal year and about 6.5% next year — an exception in a world facing slowdown and even recessionary risks. But it won’t be easy as India too will be buffeted by strong headwinds. According to IMF’s projections, India’s growth rate will be 6.8% this year and 6.1% next year, way above the US’s 1.6 and 1%, Euro Area’s 3.1 and 0.5%, UK’s 3.6 and 0.3% and China’s 3.2 and 4.4%, respectively. However the size of the US and Chinese economies are about seven and five times bigger than India’s, respectively.

So a plain vanilla comparison of GDP growth with those biggies will be fallacious. IMF’s projections, however, indicate three broad trends. One, India’s economic health is still better than many nations, including the UK. Two, barring exceptions such as China, the economic situation of most nations is projected to only worsen next year. Three, advanced economies such as Europe and the UK, which also happen to be India’s important export markets, may find themselves on the edge of recession next year.


According to Rumki Majumdar, chief economist of Deloitte India, inflation and the extent of global slowdown could pose risks for India’s growth. The fallout, though, won’t be uniform. “I think the consumer sector will be most affected, especially discretionary spending. But high-end products will sell as high-income population is spending. IT will do better because of dollar depreciation but big and longterm projects will be delayed,” she says, adding that oil prices could ease, which in turn will have a positive impact on downstream chemicals.

Economists have been looking at Q1 and Q2 numbers to find clues to growth for this fiscal year as well as the next. In the Q2 data, the standout factors are higher-than-expected investments, a robust growth in the services sector and a contraction in manufacturing, the last one being a surprise, considering industrial activities, unlike services, had bounced back last year. But these numbers need to be read in the correct perspective.


While analysing the Q2 data for ET, chief economic advisor of EY India, DK Srivastava, says the robust 14.7% growth in the category of trade, hotels, et al, “may not be considered unduly positive” and contraction in the manufacturing sector “should not be viewed as unduly subdued”. After all, the growth in the sector titled “trade, hotels, et al” is merely 2.1% compared with the Q2 of pre-Covid FY20 whereas the manufacturing sector, which contracted by 4.3% in the recent quarter, has expanded by 6.3% over the comparable pre-Covid quarter.

So, it’s too early to celebrate the return of hospitality sector whereas the recent slide in manufacturing could be a temporary aberration. As elaborated in the Union finance ministry’s monthly review for October, the global manufacturing PMI (Purchasing Managers’ Index, an economic parameter) slipped to the contractionary zone of below 50 for September and October whereas the global composite PMI, another measure to judge overall economic activity, has remained in the contractionary zone since August.


“The impact of increased borrowing costs and stubbornly high inflation are beginning to show in multiple leading indicators of global economic activity,” the report says, adding that global slowdown could dampen India’s exports outlook. India’s merchandise exports in October declined by 16% y-o-y, touching a 20-month low. Export numbers are an important component in GDP calculation. The share of goods exports in GDP increased to 13.3% in 2021-22 from 10.9% in 2020-21, according to government data, whereas the combined exports of goods and services in India’s GDP stood at about 21%.


With the global scenario dampening, India is now banking on resilient domestic demand. Former Union industry secretary Ajay Dua says there could be two key domestic challenges. “First, private sector investment, which drives growth, is still not along expected lines. Second, aggregate demand, which is built up only when ordinary citizens have more money in their hands, is not yet visible.” India will need a high growth trajectory for a sustained period to lift more people out of poverty.


Ashok Lahiri, former chief economic adviser to GoI and BJP MLA in West Bengal, says India will need at least 8% GDP growth for a decade. He says he is hopeful as “India is the only economy other than the US which the world has been betting on”. His hopes, he says, emanate from the recent surge in foreign direct investments in India, the country’s vibrant entrepreneurship and an increased spend on infrastructure.

There was a time when India was pursuing a double-digit growth to catch up with the big and the mighty. But the scenario has changed dramatically. A growth of 6.5-7% is considered a new normal now. “Had the world been more kind, one might have expected 8.5% real growth,” says Bibek Debroy, chairman of the PM’s Economic Advisory Council, “In a world that falls short of that ideal, 6.5% to 7% is not something to be scoffed at.”

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