India’s GDP growth encouraging, but some cautions must for sustaining its resilience

India released its Gross Domestic Product (GDP) data for Q4FY2023 on May 31, 2023; 6.1% real GDP growth in Q4:2022-2023 is a magnificent performance. Even with an array of downside global risk and uncertainties in the last couple of years, India continued to be an outperformer and an extraordinary contributor to global growth.

Two crucial questions emerge: first, what made India’s performance globally so different? Second, is this fuelled by structural factors, or fundamentals? This question is crucial to analyse since further uncertainties are yet to reveal, such as expected rise in home loan rates, and its impact on consumption demand, export contraction and potential El Nino effects on crops, food prices and farm income.

India in global comparison  

The IMF’s World Economic Outlook, April 2023 report provides real GDP growth data for all countries for 2019 to 2022 (provisional), and also forecast for 2023. The Figure 1 provides a comparison of select global regions of economic, social and political importance, alongwith the data for India. Among few commonalities, it is observed that all the regions and India as well, have contracted massively in 2020, as captured in terms of their negative growth rates. This is the pandemic-driven economic shock, nonetheless, all the regions rebounded back very fast in 2021 onwards with positive growth rates. Among the dis-similarities, regions such as Emerging and developing Asia, and South Asia in particular as a country group, have been the outperformers altogether in global growth. Within South Asia, in 2019, and during post covid also, India has been an outlier. While projections for the advanced G-7 (1.1%), Euro Area and (0.8%) other advanced western countries’ growth numbers hovered around 1% in 2023, India’s growth projected to be at 5.9% in 2023.

In fact, the IMF in their recent report on Regional Economic Outlook released in May 2023, mentioned that in spite of monetary tightening, weakening demand, domestic demand and growth remained robust in this region. The Global Economic Prospect (June, 2023) released by the World Bank underscores that in their regional economic outlook that South Asia, Latin American countries, and Sub-Saharan economies will find drag on economic activities due to global headwinds leading to weak external demand, tight financial conditions, and high inflation. It mentions the increasing likelihood of financial shocks in emerging and developing countries induced by a more hawkish monetary policy stance adopted by the Fed in the USA, that led to substantial rise in interest rate. Towards policy action an important suggestion is that the central banks can alleviate the adverse spill-overs largely, by well narrated communications to express their reactions functions. The IMF and others reports indeed show that El Nino factors, war induced supply-chain disruption, tightening of monetary policy etc., have been important contributors in the global growth turmoil that we envisage. But, how did India manage to decouple itself from others, even from its emerging peers?

On positive note, India’s inflation is moderating and RBI’s recent decision on holding policy rates (repo, SDF, MSF) unchanged being focused on withdrawing accommodation of monetary policy stance to align it with inflation target and simultaneously, support vibrant growth will be key demand drivers.  The provisional estimate of inflation as per the press release dated June 12, 2023 on data released by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI) on June 12, 2023 reverberates this, inflation in terms of CPI (general) combined for the month May 2023 has moderated to 4.25 against the final estimate of 4.7 in April, 2023 and 7.04 in May 2022. As per dated June 14, 2023 press release the annual rate of inflation based on all India Wholesale Price Index (WPI) number is (-) 3.48% (Provisional) for the month of May, 2023 (over May, 2022) against (-) 0.92% recorded in April, 2023 primarily due to fall in prices, basic metals, food products, textiles etc. Also, RBI’s inflation expectation survey of households shows moderation by 60 to 70 basis points since September 2022. It is, however, noteworthy that decline in WPI based inflation led by the moderation of commodity prices and input cost pressure boosted manufacturing growth in real terms. These are however globally-induced, not fundamentally linked to the indigenous factors.

Indigenous factors driving India’s growth?

Front loading of Capex and a continuous push on Gross Fixed Capital Formation (GFCF) have been the real growth drivers. Moreover, there are several indicators at the global level that shows Indian economy is having a vibrant policy-induced growth. For example, in terms of World Bank’s Logistics Performance Index India jumps by six points due to government’s aggressive effort on improving transport infrastructure where logistics constituting 33% of the National Infrastructure Pipeline, also many high frequency indicators such as E-way Bill and toll collections reached new heights in March 2023, . The MOSPI data  released recently shows that both the GFCF growth and its share in GDP have been high, implying government’s intent to vigorously boost the multiplier effect. Among the latest growth numbers, the real GDP growth in FY 2022-23 over the last year and Q4: FY 2022-23 over the last year’s Q4 have been very impressive at 7.2% and 6.1% respectively. It needs mention that this Q4 data will be revised further, as we find that the Q1-FY 2022-23 number has been revised down over subsequent revisions from 13.5% (released as on FY2022-23 Q1) to 13.1% (released as on FY2022-23 Q4). Nonetheless, 6.1% quarterly growth is definitely well above the global average and beyond expectations for many advanced nations. So the pertinent question that arises is, what are the factors that are driving this exuberance, and are they truly ‘fundamental’?

Looking from a different perspective – the supply factors rather than the demand contributors of GDP, questions emerge on possible underlying factors that pulled the growth. Understandably, production increases if labor (in aggregate) increases, its productivity increases (by and large due to the technology factor), or capital usage increases. Undeniably true it is that technology has taken a giant leap in the last few years with rapid computerization and the high rate of penetration of AI-enabled exposure in workplaces. Obviously it is that the capital usage in production has increased tremendously in India. What about the first factor – workers used? Understandably, a big part of this recent technology has been labour replacing. It is quite well-discussed and debated that Indian manufacturing was ailing for years due to regulatory barriers in the labor market.

Many states are yet to embrace the new labor codes, and at this cusp due to possible socio-political uncertainties relating engaging contractual labor and their retrenchment policies, there could be convincing reasons for manufacturers to adopt labor replacing technologies if they find it worthwhile economically, or have access to it. This coupled with the fact that employment growth has been stagnant in the organised sector of Indian economy during the recent years for many reasons, leads us to the hypothesis: is it the capital-intensive sectors that have been the net-contributors then? But this seems implausible given the robust growth the manufacturing (from -1.4% in Q3: FY2022-23 to 4.5% in Q4: FY2022-23) and construction sector (from 8.3% in Q3: FY2022-23 to 10.4% in Q4: FY2022-23), have shown. These are definitely labour-intensive. One likely reason and a silent player behind the scene could be, fall in the size of the unorganized sector.  This is likely, given the tremendous growth in GST collection which had happened not because of revenue growth only, but also due to rapid formalization of productive activities as captured by the rising depth and width of the GST network. This was definitely one of the targets of the incentive-based GST design. If that is the case, then definitely a non-negligible extent of GDP rise is coming from the expansion of the organized sector. This is less likely to be captured in the official estimates of GDP numbers, but indeed has been a strong growth driver.

The MOSPI data shows that the contribution of PFCE in GDP (constant price, 2011-12 series) has risen marginally from 58.3 to 58.5%, a marginal rise in GFCF and a fall in GFCE from 10.6 to 9.9% are notable. These two are discretionary policy-induced, and compared to PFCE which is mostly an outcome of market or policy response. Another notable change is observed in the contribution of “discrepancies”, which has come down to -3% in 2022-23 from -2.4% in 2021-22. These disaggregated numbers provide a better insight of the underlying fundamentals.

Mathematically, both the change in the percentage contribution and the absolute changes in the GDP components, have contributed to India’s high GDP growth. Figure 1 and Figure 2 provide a comparison of the share in the components and their changes in recent times, and the growth contributions (in%) of the components respectively. The comparison shows that it is the GFCF that have been the major growth contributor, and a big part of it is the discretionary policy push of the government in terms of capex.  On the contrary, PFCE contributed 60.63% in the GDP growth in FY2022-23 whereas its share is 58.5% (in constant prices-2011-12 series). Surprisingly, a large negative contribution of the “discrepancies” is observed in the growth contribution for FY2021-22, which became positive albeit small in FY 2022-23.

This analysis clearly indicates an in-depth understanding of both the underlying fundamentals that are driving India’s exceptional performance at present, and those that are likely to sustain as the key drivers of future growth.

GDP estimates, and the methodology:

Another crucial factor that needs mention is that as described by MOSPI as the revision matrix, the annual GDP at current prices estimates come six times with five revisions in subsequent periods; these are first advance estimates, second advance estimates, provisional estimates, first revised estimates, second revised estimates and third revised estimates (Table 1).

The fundamental question that emerges now, is it indeed the case that global factors hindered GDP growth via exports and imports, as it is the case for all economies and India is no exception? Did the discretionary policy interventions play crucial roles to mitigate such perturbations, and could in fact, pull the growth by a considerable large extent? India is an example. Nevertheless, the non-discretionary macro-fundamentals that are crucially linked with the indigenous factors, and influence GDP demand components definitely are the private consumption demand and investment sentiments. In order to critically understand the sustenance of such visibly different growth performance, these definitely need attention and a deeper analysis.

Should this 7.2% real GDP growth for 2022-23 make us feel elated or we need to be more realistic or circumspect to face the future with greater objectivity, preparedness, success and confidence?

The following factors need to be borne in mind.

1. In 2020-21, India’s real GDP contracted by 5.8% compared to previous year whereas the global GDP and GDP of most developed countries contracted by 2% to 3%. So India’s low base effect needs to be borne in mind in this regard.
2. Average annual real growth of GDP in India during 2014-15 to 2022-23 at 5.7%, was much lower than average annual real GDP growth of the nine years preceding period. that is, 2005-06 to 2013-14 at 7.4%. Similarly, India’s average annual real growth in per capita income during 2014-15 to 2022-23 at 4.22% was significantly less than India’s average annual real per capita income at -5.78%.
3. If we take average annual real GDP growth for India for the last three years, that is, 2020-21 to 2022-23, this is only about 3.5%, that is in real sense, our GDP is only about 10% higher than the level prevailing in 2019-20, which itself is a low growth year depicting 3.9% real GDP growth in 2019-20.
4. If we see the real GDP growth of India including projection for 2023-24, we see a distinct decelerating trend: 9.1% in 2021-22, 7.2% in 2022-23 and 6.5% projected growth for 2023-24.
5. Even taking RBI’s quarterly projections into consideration for 2023-24 with 8.0% for Q1, 6.5% for Q2. 6.0% for Q3 and 5.7% for Q4, it shows a clear deceleration.
6. When the share of private final consumption expenditure to GDP at current prices declined from 61.1% in 2021-22 to 60.6% in 2022-23, which is the largest engine of GDP growth, we need to be careful and ponder over the fundamentals, credentials and buoyancy of our GDP future growth.
7. We need to be mindful of the situation when from 2021-22 to 2022-23 the share of private final consumption expenditure in GDP at current prices is declining from 61.1% to 60.6%, the share of government final consumption expenditure in GDP at current prices is decreasing from 11.2% to 10.3% and the share of net exports in GDP at current prices have contracted from (-)2.7% to (-)3.6%). Another thing to worry about is the increase in the share of discrepancies in GDP at current prices from (-)0.9% to 1.7% from 2021-22 to 2022-23, an increase of 2.6% which kind of captures the flaws in data and methodology.
8. One very important issue is that of decline in the contribution of the informal sector in GDP and employment. So the question that arises is the main source of this 7.2% real GDP growth. In a situation of stagnant employment growth, whether this growth is coming from the higher corporate sector growth. Or to say in other words, this growth of 7.2% is largely facilitated by the shrinkage of the contribution from the informal sector and change in technology or technical change.
9. The quarterly real GDP growth rate for both 2021-22 and 2022-23 suggests that quarter wise, there is a clear decelerating trend during both 2021-22 and 2022-23.  During 2021-22, the quarterly year on year real GDP growth decelerated from 21.6% in Q1 to 9.1%, 5.2% and 4.0% in the Q2, Q3 and Q4 respectively. Similarly, in 2022-23, the real quarterly GDP growth decelerated from 13.1% in Q1 to 6.2% and 4.5% in Q2 and Q3 respectively. So we need to be cautious so that we are not over complacent. We also need to bear in mind that the GDP at constant prices for all the first three quarters of 2022-23, are lower than the GDP level of the last quarter of 2021-22 (Q4). So we need to fasten our belt to stem any possible emergence of decelerating or recessionary tendency in our GDP in the coming few years.
10. Manufacturing sector’s growth performance during 2022-23 compared to 2021-22, is indeed a matter of concern. Its growth has hugely decelerated from 11.1% in 2021-22 to 1.3% in 2022-23. What is more, if we see the quarterly data of real growth of manufacturing sector’s value addition, we find a significant deceleration in 2021-22 from 51.5% in Q1 to 6.6%, 1.3% and 0.6% in Q2, Q3 and Q4 respectively. If we see quarterly data of the real growth of the manufacturing sector during 2022-23, we find that the Q2 and Q3 show negative growth of (-) 3.8% and (-)1.4% respectively.
11. We also need to bear in mind that the successive quarterly data for the same quarter undergoes so many revisions (sometimes significant ones) at AE and PE stages that one should not feel overconfident by the relatively initial data. It takes about four to five years to get the final data for a year concerned.

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