There have been a slew of reports and papers on the Indian economy in the past two weeks. The most important one was the Government’s own release of data on the economy. This was the official growth estimate for the second quarter of this fiscal year, i.e., from July to September from the National Statistical Office The data comes with a two-month lag and was released at the end of November. The other major report was from the Reserve Bank of India’s Monetary Policy Committee. The MPC gave its latest estimate of growth for this fiscal year as well as outlook for inflation. Just a day before the MPC forecast was a report from the World Bank on India’s growth for this year and the next. Apart from these reports from reputed and official agencies, was a report on India’s decadal prospects, from the global bank Morgan Stanley, which got a lot of publicity. Apart from these reports there were several others with an in-depth analysis of growth performance and prospects, complemented by the constant flow of real-time data such as the stock market, tax collections, passenger and cargo traffic, corporate profitability results and so on.
Are the major reports consistent with each other? Take the MPC of the Reserve Bank of India. The MPC revised growth estimates downwards from 7 to 6.8%. It was concerned about the global slowdown, the negative impact on India’s exports and headwinds from geopolitical tensions. Added to all this was the tightening of global financial conditions, i.e., higher interest rates and perhaps lower capital flows to emerging market economies like India. The MPC said that for the next quarters growth would slow down even further to 4.3 and 4.2% respectively. None of this is exceptional. You can’t accuse the MPC of being unreasonably cautious. By contrast the World Bank revised its estimates of India upward from 6.5 to 6.9%, citing improved prospects for the domestic economy. Their respective caution and optimism might appear to be contradictory, but their final number estimate of growth in fact has almost converged. So maybe the World Bank was too cautious earlier and hence revised its estimate upward.
The Morgan Stanley report is extraordinarily upbeat. It takes a decadal view and predicts a doubling of the economic size to 8.5 trillion dollars, and also its per capita income. The report is addressed to global stock market investors and tells them that India’s rise and growth in its stock market is “once in a generation shift, and (great) opportunity for investors and companies”. Since it takes a medium- to long-term view, you cannot disagree with Morgan Stanley, at least for now, although the Financial Times of London, commenting on this report, advises caution to investors. Growth alone does not spell stock market wealth, especially for dollar investors. The FT cites the examples of Brazil and China where stocks investors have lost money despite good economic growth.
So, it’s best to examine the data as reported by the Government itself and then make a prognosis. The second quarter saw the economy expanding by 6.3% (compared to last year, same period), and this rate of expansion was slower than 13.5% recorded during April to June. So, the slowdown is palpable and the next two quarters might see even slower growth. In terms of the size of the economy it is only about 7.5% bigger than in 2019, which means over the past three years the average growth is barely 2.5% per year. This is the impact of the sharp dent during Covid. But over that same period the U.S. economy (with half a million Covid deaths) has expanded faster and so has China (with very few deaths, and despite very harsh lockdowns). It is true that even at 6.8 or 6.9%, this year India will continue to be the fastest growth economy in the world. Bear in mind that China and U.S. together make up 45% of the global economy, whereas India’s share is 3.5%. So, India’s growth has to be much higher in order to make a difference in its domestic living standards.
The drivers of economic growth are consumer spending, investments in new capacity and projects, Government’s fiscal push and exports. The latter clocked negative during October and is badly affected by global recession. In gems, jewellery and engineering, exports were down by more than 20% compared to last October. Even software exports, which are India’s strong point, will be affected by massive layoffs in the tech sector in the United States. As for the Government’s support, since there is no fiscal room to further expand the deficit, it cannot be counted upon to support growth next year. The combined fiscal deficit (states plus Centre) is above 10% of the GDP and the debt ratio is also at a high of 90%. As for investments, the FM has exhorted the private sector to increase investments.
There are early signs, but overall the numbers are very sluggish. The recent impressive growth in bank credit should be treated with caution, since much of that growth has come from housing, vehicle loans and retail credit. This accounts for a very small portion of consumers. The real push must come from credit growth to industry and commercial projects. As for consumer spending supporting strong growth, that is hampered by two things: inflation and unemployment. Inflation has been above 6% for almost three years. That affects consumers, as they try to cut back on the purchase of discretionary items.
Wholesale price inflation which affects producers and small entrepreneurs is in double digits. The other influence on consumer spending is from unemployment which has now officially climbed to 8%. Job anxiety too can curtail consumer spending. So, all four growth drivers — consumers, investors, government, and exports — are facing challenges. Hence, slower growth during 2023 is to be expected. Added to this are the challenges from the exchange rate, since the trade deficit is large. Interest rates are already rising adding to the cost of borrowing and cost of capital.
India can take solace that its growth rate is higher than most of the other large economies. But in the coming year the focus needs to be on increasing resilience and ensuring that lower growth does not cause more hardship to the poorest in the country.
Dr Ajit Ranade is a noted economist. Syndicate: The Billion Press, email: firstname.lastname@example.org
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