The latest GDP data, released last week by the National Statistics Office (NSO), confirms that the economy has limped back to its pre-pandemic size in real terms during FY 2021-22. However, the pace of recovery lost momentum during the fourth quarter due to the third Covid wave and heightened global risks. For the full year, the real GDP registered a growth of 8.7 per cent over the last year, after witnessing one of the deepest recessions in FY 2020-21. In the fourth quarter of FY 21-22, real GDP registered 4.1 per cent growth, compared to 2.5 per cent in the same period last year. But this is far lower than what was forecast by the RBI in December, which possibly indicates the extent to which the economic environment has worsened in the last few months.
While the NSO’s GDP growth estimate for FY 21-22 is lower at 8.7 per cent, compared to its earlier estimate of 8.9 per cent, in absolute terms, GDP growth in the last financial year was only 1.5 per cent higher than the pre-pandemic year, showing a slow recovery in economic activity from the losses suffered during the pandemic. Though the expansion of 8.7 per cent in 2021-22, from a contraction of 6.6 per cent in 2020-21 appears impressive, it is primarily on account of a low base. What’s more, in the pre-pandemic year of 2019-20, GDP in the fourth quarter was 38.21 lakh crore and India has crossed that number only in the fourth quarter of 2021-22 – 40.78 lakh crore.
Among the three broad sectors, industry, which grew at 10.3 per cent, saw the highest growth in the fiscal year, compared to a 3.3 per cent contraction in 2020-21. This was followed by the services sector, which grew at 8.4 per cent compared to 7.8 per cent in 2020-21 and agriculture, which grew at 3 per cent. Even during the pandemic year, agriculture was one of the key positives of the economy. On the expenditure side, gross fixed capital formation, used as a proxy for investments in the economy grew at 15.8 per cent in 2021-22. On the other hand, private final consumption expenditure, an indication for demand in the economy which also contributes the most to GDP, grew at 7.9 per cent, while government consumption grew at 2.6 per cent.
While the growth rate of 8.7 per cent, the fastest in close to a decade, looks great but recovery appears still fragile, given the state of inflation, unemployment and the number of people below the poverty line. Economic experts are of the view that the headline GDP growth could be masking symptoms of a deeper slowdown that the broader economy may have slipped into. For, the striking graph of the NSO estimates is the quarterly growth rate of the last financial year, which shows a downward trend. From a high of 20.1 per cent in the first quarter of 2021-22, aided by a low base in the earlier year, the pace of growth has actually fallen in every subsequent quarter, making for a consistent descending line – 8.4, 5.4 and 4.1 per cent, respectively. This shows the growth rate has weakened with every quarter indicating a tenuous recovery.
What is equally concerning is manufacturing where gross value added has contracted 0.2 per cent during January to March quarter. Expansion in the construction sector also appears to have slowed down considerably at 2 per cent in the quarter. Private final consumption expenditure, an indicator of household spending, also appears to have slowed down sharply. In the fourth quarter, it grew just 1.8 per cent, implying that household consumption has not picked up pace. This reflects unevenness in recovery has also subdued household expectations about income growth and lower consumer confidence, which is affecting sales of products and services.
The slowdown has come at a time when the war-induced surge in global commodity prices, particularly crude oil, has not only caused a spike in inflation but people are also battling with high cost of living with increasing prices of both essential daily needs and aspirational goods. Add to this the impact of the hardening of dollar against weakening rupee to get a sense of inflation getting deeply embedded that is hurting people’s purchasing power. The telling indicator of weak demand is lower per capita consumption in 2021-22 as compared to the pre-pandemic year.
While inflation will remain a cause of concern, high unemployment is another worry that should concern policymakers, as job-providing sectors like manufacturing and construction are still lagging behind. What is also the cause of concern is the fact that twin deficits, fiscal and current account, are back to haunt us. Given the havoc caused by the pandemic, the fiscal deficit was perhaps inevitable. But the current account deficit is said to be partly a consequence of policy errors. Though the pandemic is now almost behind us, the twin challenges of a rising inflation and growth slowdown resulting in stagflation may not be ruled out.
The prediction of another normal monsoon bodes well for the economy, as normal rains are critical to keep food prices down and raise rural incomes. But consumption recovery remains uncertain amid decline in per capita income, high inflation, and rising interest rates, which could temper the growth momentum in 2022-23. The RBI in April lowered its estimates of the current fiscal year’s GDP growth from 7.8 per cent to 7.2 and there is a likelihood of a further downward revision at its review of monetary policy this week, as the central bank pushes the policy rates closer to the pre-pandemic level. The RBI has clearly been behind the curve in controlling inflation.
Its monetary policy of excess liquidity has been counter-productive. The delay in fighting against inflation, a mandate given to the central bank under the 2016 amendment to the RBI Act, has been costly. It has affected economic recovery amid mutating demand.
(The writer is an independent Mumbai-based senior journalist. He tweets at @ali_chougule)
