By DK Srivastava
The Indian economy is normalising at a fast pace after the Covid shock whose adverse effect had remained prominent until the first quarter of 2021-22. As per NSO’s provisional estimates released on 31 May 2023, the annual real GDP growth for 2022-23 is shown at 7.2%. This contains the first quarter growth of 13.1% which reflects a strong base effect in the preceding year. The average growth for the second, third and fourth quarters of 2022-23 at 5.6% is therefore indicative of normal growth in the post-Covid period. Most of this growth is driven by domestic drivers since the contribution of net export growth during this period averaged at (-)0.5% points.
Domestic growth drivers: output and demand sides
Out of the eight GVA sectors, agriculture has shown a consistent growth averaging at 4.2% for the last three quarters of 2022-23. During this period, the two core service sectors, namely trade, hotels et. al. and financial, real estate et. al. showed average growth rates of 11.4% and 6.6% respectively. Their contribution was supplemented by an average growth of 8.1% in construction. The manufacturing sector, however, has not fully recovered yet since its three-quarter average growth continues to languish at (-)0.2%. Manufacturing had contracted in 2019-20, prior to Covid. Taking a longer-term picture, the compound annual average growth for this sector during the period 2018-19 to 2022-23 has been a little less than 3.0%. Clearly this sector requires policy support for uplifting both output and employment growth, pushing the economy closer to its potential growth of 7.0%.
On the demand side a robust feature of growth is reflected in the average growth of gross fixed capital formation at 8.8% over the last three quarters of 2022-23. This includes the contribution of the growth in government capital expenditure. Although data for this in real terms is not available, growth of Union Government’s 2022-23 capital expenditure in nominal terms was as high as 24.2% as per the CGA.
Growth in private final consumption expenditure, however, continues to show sluggishness. Its average growth over the last three quarters was only 4.4%. Growth in government consumption expenditure during this period averaged (-)0.8%. Thus, the post-Covid recovery has been driven primarily by growth in capital expenditure especially that of the government while domestic consumption expenditure growth has remained sluggish. Further, the external sector continues to constitute a drag on the economy.
To some extent, government finances have been helped by relatively high inflation reflected in the implicit price deflator of GDP at 8.2% for 2022-23. With a nominal GDP growth of 16.1% and a buoyancy of 0.8, growth in centre’s gross tax revenues turned out to be 12.8%. With a budgetary policy focussed on expanding capital expenditure and limiting revenue expenditure growth, it has been possible to contain government’s fiscal deficit in 2022-23 at the budgeted target of 6.4% while enabling a healthy capital expenditure growth.
India is well on its course to remain a global growth leader among the relatively larger economies of the world. As per April 2023 IMF projections, world growth is expected to be 2.8% for 2023. Over the medium term from 2023 to 2028, global growth is expected to average close to 3.0%. In comparison, India’s average growth is projected to be more than double of this at 6.1%. This growth would require, as per IMF’s estimates, a nominal investment rate of close to 34%. In 2022-23, as per NSO’s provisional estimates, the nominal investment rate has turned out to be lower at 31.0%. Economic policy, over the medium term, needs to focus on uplifting private investment. Continued emphasis on government capital expenditure would help crowd in private investment. Further, improvement in the external situation would be critical for India’s robust medium-term growth.
*D.K. Srivastava is Chief Policy Advisor, EY India and formerly Director, Madras School of Economics Views expressed are personal