The GDP numbers released on Tuesday (31 May) indicate the toll taken by the recent global uncertainties, over and above the complications left behind by Covid, and the challenges before India to retain its distinction as the fastest-growing nation in the world in 2022-23 (FY23).
India clocked 8.7 per cent growth in FY22. As per the revised estimates of the Reserve Bank of India (RBI), the country is expected to post 7.2 per cent growth in FY23. The revised estimates of IMF and World bank stand at 8.2 and 8 per cent, respectively.
The challenges are not India-specific. The entire world is suffering from the common ills of inflationary pressure, suppressed consumer demand, negative impact on growth prospects etc.
In China, banks are flooded with cash as there are few borrowers. All major property players have piled up huge unserviceable debt. Some of them defaulted payments. Some are rescued by the state-owned banks. Housing sales are plummeting.
In this context, India’s performance in FY22 is not only commendable, but it is also in sharp contrast to the looming threat of recession in many major economies.
It would be utterly wrong to look at this performance from the perspective of contraction in the Covid year of FY21 either. All major indicators like credit offtake, core sector industrial growth, and purchasing managers index (PMI) in both services and manufacturing, are in the expansion zone.
Having said that, the slow 4.1 per cent growth in January-March 2022 has raised concern. The 3.9 per cent growth in real gross value added (GVA) was particularly worrisome. India reported 5.7 per cent increase in GVA in the March 2021 quarter.
Clearly, India’s growth prospect is hit by the Ukraine crisis and the resulting volatility in the global commodity market, particularly the spike in energy prices. The crisis has set inflation soaring, forcing RBI to tighten the money supply by increasing the policy rates.
The inflationary pressure in India is not yet as severe as in the USA, Europe, Brazil, Russia etc. However, there is a concern if the growth prospects in the June 2022 quarter and the rest of the financial year will be a casualty of the twin attack of inflation and higher interest rates.
At a time when the world growth is slowing down, consumer sentiment in the domestic market will hold the key to India’s growth.
According to the Centre for Monitoring Indian Economy (CMIE), though the consumer sentiments are still way lower than the pre-Covid levels, it is steadily improving and has surpassed the March 2021 level when India was hit by the Delta wave.
The problem lies in the slow pace of recovery of sentiments. “It is good to see a steady improvement in consumer sentiments month after month, but it is somewhat disquieting that the rate of improvement has been rather small and that it is getting smaller,” CMIE reported in May.
This doesn’t necessarily mean that consumer sentiments will not improve at a faster rate at the prevailing scenario during the rest of the year. Covid has changed consumer behaviour substantially. Also, it created a huge pent-up demand.
The unprecedented rush of domestic tourists to all Indian destinations, this summer, ignoring higher costs, is a case in point. The World Travel and Tourism Council (WTTC) expects the sector’s contribution to the Indian economy to surpass pre-pandemic levels in FY23.
Other indicators are also going strong. According to RBI, credit offtake increased by 11.3 percent (year-on-year) in April this year as against 4.7 per cent a year ago.
Notably, the credit growth is not limited to corporates. The micro-finance sector, which serves the informal sector, reported double-digit credit growth in FY22. Based on the trends in April and May, many top MFIs are expecting credit growth to reach record levels in FY23.
The pace of government spending has already gone up. There is scope to increase it further. After nearly a decade, the private sector has geared up to invest in capacity expansion. It is unlikely that they will call off plans for a slight increase in interest rates.
It doesn’t mean that everything is hunky-dory. The stock market is wobbly due to sustained sellout by the foreign institutional investors (FII) to take advantage of the US rate hike.
It means equity funding has not remained as easy. Top public offers, like that of the Life Insurance Corporation (LIC), ended up below the issue price. Start-ups are also feeling the heat.
However, it is questionable if every blame should go to the market correction. Post-listing crash of Paytm shares was an eye-opener that easy finance options encouraged promoters to raise money at abnormal valuations.
To take a more realistic look, things on the ground are not as bad as may be perceived by the fourth quarter GDP numbers.
Considering the sharp rise in headline inflation in April-May, the growth numbers of the first quarter may remain subdued as well. However, the recent initiatives by the Narendra Modi government to arrest inflation may be crucial for growth in the subsequent quarters.
India cannot do much about the global unrest. The latest decision by the European Union to curb most of the oil imports from Russia and re-opening of China has sent the oil prices through the roof again.
It is to be seen how a struggling Europe can manage the price shock but, rest assured that the global economy will have to face many political uncertainties this year adding to the inflationary pressure.
The core job of the government, therefore, is to keep inflation under control and ensure domestic demand. The recent cuts in duties on petroleum products, curbs on market export of wheat and sugar, and export duty on steel indicate that the government is serious about it.
These are surely not the only option. From increasing intake of Russian crude at a discounted price to the proposed import of coal through Coal India Limited (CIL) to help price pooling – the government is working on multiple fronts.
Arresting fiscal deficit of the Union government at 6.7 per cent (below the revised budgetary estimates of 6.9 per cent) and 31 per cent reduction in the gross fiscal deficit of 26 out of 28 states in FY22, are extremely positive developments.
It’s a dynamic situation. Past experiences and theories will not work. A cautious approach with centralised decision making will be extremely crucial.
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