Ever since the GDP data for the December 2022 quarter was released, there’s been controversy and concern. The last is understandable — economic growth has been moderated to 4.4% from 6.3% recorded in the preceding quarter, although the outcome matched the central bank’s projection while falling marginally short of consensus expectations. Officials have pointed out that this is more of a statistical artefact — the national accounts for the previous two years undertook large adjustments upwards — and that this data will no doubt be similarly reviewed in time with a simultaneous acknowledgement that the downside risks have increased. Is the recovery gaining strength or is there reason to worry about the economy?
A brief factual review is helpful. The third-quarter growth dip is certainly in part due to the base. The best thing to do then is skip annual comparisons and look at quarterly improvements instead. Against this or the September 2022 benchmark as well, the sequential growth momentum slowed sharply to almost half. The economy increased by a mere Rs 1.37 trillion in size relative to the previous quarter. Private consumer spending and business investments both lost pace (also annually, but this signal is noisy). This was against expectations of a knockout mix of lockdown, festival, and resurrected services’ demand in our reference period.
The lone growth bastion — government expenditure — did pick up although the absolute sum spent isn’t different from that in the matching pre-pandemic quarter (Oct-Dec 2019), indicating that the impetus from public capex wasn’t very forceful. On the external front, the fall in import growth exceeded that in exports, lessening the net subtraction from aggregate output as a result. The outstanding weak pocket on the production or supply side of the economy is manufacturing, where output growth has remained feeble in succession.
A quarter of this financial year remains. The hope is that the continuation of the rebound in services, segments of which have pronounced informality and flexible responses, will generate additional demand spillovers by creating employment — of good-monsoon stimulation to rural demand that’s been tepid till now; reinforcement from public capex and so on. Counter signals come from the moderating growth of GST collections, bank credit, two-wheeler sales, amongst a few examples. Further signs in the first two months of this year invoke doubts if the spontaneous part of the recovery is wearing off.
A key thought to note in this context is that this is not a recovery from usual downturns, which are better understood. Therefore, they make it easier to imagine how the economy will evolve in the future. This is a recovery from a pandemic accompanied by inflation. Its dimensions are universal, not confined to India. Many known and unknown forces are impacting output, some of which may carry forward into the next year while others may well last longer beyond that.
For one, this is the first year when individuals have been freed from contagion fears and pandemic restrictions, many bottlenecks and shortages from the virus’ disruptions for almost two years, and the restraints upon services. There’s a blend of suppressed demand, accumulated savings and wealth gains, the completion of pending purchases (for example, pipeline car bookings manufactured and sold this year with easing supplies of semiconductor chips), a rotation to different goods and services, amongst important ones. However, the finer elements of these remain unclear. The probable attributes of economic revival to expect are unevenness and non-linearities because the impact of the pandemic upon households and businesses was asymmetrical. For example, there was acuter injury to contact-intensive services while others, such as homebased work, leisure, tech-enabled goods and services, did well. The individual lags and magnitudes of restoration are not straightforward to analyse or project with certitude. The extent of damages caused to output is not identified; neither is it known if these are temporary or permanent, and in what proportion. There’s little historical guidance of modern relevance. So even a tentative understanding requires a lot more granularity and real-time information.
Two, disentangling the automatic or pandemic-specific component from the normal business cycle upswing is complicated by other factors that are yet to abate or mature. Inflation has been a neutralising development, pinching household incomes and slowing the growth momentum. Its offsets — tighter monetary policy and rising interest rates — are hurting business margins. So far, there’s no surety that the price rise has fully subsided; emerging signs on various food items elicit caution about firmer consumption in the coming months.
Three, the global environment, which the Indian economy is closely wired into, cannot be taken lightly. The resurgence of inflation after decades in advanced countries is well-known. However, the fallout of a 500-basis point rise in the US interest rates in a year in a background of sustained, extraordinary monetary easing by major central banks and setting of high debt levels across countries has no historical examples for the present. Traditionally, an appreciating dollar, monetary tightening, and tighter liquidity have been associated with slowdowns and recessions; recent research finds dollar appreciation shocks can predict economic downturns in emerging markets and in developing economies. In this instance, the rapid and monumental shift in US interest rates has created serious financial stability risks. The first casualty materialised last week in the collapse of the tech-lender, Silicon Valley Bank; responses to avert larger collateral damage are hobbled by direct conflict with the inflation-control objective, incurring moral hazards and other issues.
From this lens, the capacity of domestic demand to power growth by itself is doubtful. Despite improvements in agriculture, mining, services, and construction, consumer demand remains unassured. The claim of private investment regenerating on the back of cleaned balance sheets of corporates and banks, structural reforms, and more supportive policies is challenged by the fall in manufacturing growth. It is instructive that the entire focus of reforms in the last three decades has been upon manufacturing — to grow its size, scale, and generate mass employment to absorb the agriculture labour surplus — but with little success. Time will tell if exports and manufacturing revive. Meanwhile, there’s more than one reason to worry about growth.
Renu Kohli is an economist with the Centre for Social and Economic Progress, New Delhi
