This year begins with an unexpectedly positive backdrop of the recently ended year. Economic outcomes routinely overturned expectations of a worsening. Some of the major endings in 2023 that went against the tide of initial forecasts are the steep declines in inflation across countries, including the United States of America whose monetary policy matters the most for the world economy; avoidance of recessions despite the massive increase in interest rates and tighter financial conditions; China’s faltering growth with deflation; and the opposite of this in Japan. India has been in a somewhat similar situation — the advance estimates of 2023-24 released earlier this month place gross domestic product growth at 7.3% against the 6.4% projected by the central bank last February, whereas inflation is expected to increase just 10 basis points more than the initial prediction. What do these developments portend for the Indian economy in the future?
The resilience inherited from last year also includes pressures and uncertainties, which could aggravate or fresh ones flare up this year. Higher interest rates could start biting consumers and firms; US monetary policy reversal could be delayed while interest rate movements could remain unclear for longer; the last mile to inflation targets could be difficult for countries; political tensions and conflicts could escalate, and new ones arise; and climate-related threats to output and trade may intensify. Multilateral bodies are pessimistic about world economic prospects, including in the medium-term. The World Bank assesses the half-decade to 2024 will be the worst growth performance in 30 years, chiefly due to higher borrowing costs, geopolitical tensions, and China’s growth slowdown weighing upon its trade partners, particularly in East Asia. The International Monetary Fund’s deep dive into global trade fragmentation and restrictiveness shows lasting consequences of raised costs, feeding into inflation and weakening growth.
These impulses will transmit to the Indian economy through trade and financial linkages, increasing instability risks. The impact will also be felt through the confidence channel, which influences domestic sentiments. Therefore, it is the domestic sources that will provide the main growth impulse in 2024, a fact that is commonly known. This is also what makes India the economic flavour of the world at this point. More than the recent growth performance, it is India’s bigger base of domestic demand — compared to the majority of the emerging and developing economies that are dominantly exposed to foreign demand and interconnected through global value chains — that is the main attraction.
In this context, what can be inferred from the current year’s growth composition for 2024?
It is universally acknowledged that some of the 7.3% GDP growth is a statistical artefact. This is due to the extreme swing in the GDP deflator, which is induced by the steep fall in producer or wholesale price inflation that dominates construction of the national accounts. Such aberrations correct with time and a normalising effect will thus also be observed in the forthcoming year.
The underlying production and expenditure patterns in 2023-24 sound a note of caution for the growth path ahead. Because this has been the first fully normal year after the pandemic — it saw the complete reopening of services, the end or easing of supply bottlenecks and so on — looking at these in a longer time frame is essential for meaningful inference. The overall growth base has insufficient breadth. For one, there is heavy dependence on the construction segment, whose contribution to gross value-added growth in 2023-24 is three times bigger than the pre-pandemic trend addition. Therefore, any fallback or reversion to a normal trend, as the law of averages would suggest, is likely to have a significant bearing on growth in the forthcoming year. As construction absorbs the greatest number of unskilled persons, this will have implications for the strength of mass consumer demand.
Then, much of the construction activity is inspired by public capex, which has driven post-pandemic growth — its contribution is above its historical average so far. This also spurred growth in fixed investments, which added nearly half the growth in GDP. Next year, the government spending component faces constraints from slower growth in nominal GDP as inflation falls, elevated public debt and return to normal expenditure pattern. The forthcoming budget will offer a preview of these aspects.
Another pressure point appears to be the job-rich services segment, combining trade, hotels, transport, communication and broadcasting-related services, whose falling contribution to growth in gross value-added is under its pre-pandemic annual average. This is concerning, although it is still early to say if this reflects a permanent shrinkage.
By far, the most disturbing is the rapid descent of growth in private final consumer expenditure, which slowed to almost half its rate of growth last year, and a third of that in the first year of recovery after the pandemic. Moreover, its addition to overall GDP growth in 2023-24 also slipped below its historical trend contribution. Mapping this weakness in consumption demand with the outsized contribution of the construction sector with doubtful sustenance and the feeble growth impulse from the employment-intensive services component, the downslide in consumer spending becomes a real concern for the growth trajectory ahead. Consumption constitutes more than half of India’s domestic demand base and, if this shortfall persists, it will affect business investments adversely at a time when both firms and banks are healthy and ready for the same while the spending capacity of the government for growth support declines.
How these drivers unfold and progress in the coming months has a significant bearing on the economic outlook for the new year. It is noteworthy that quite like last year, this one too starts in a growingly endangered context — a mix of political and economic threats — with a debt overhang and slim fiscal spaces, if any, to manoeuvre for demand support. These features would suggest a sobering rather than an economic upswing. However, the customary wish at the commencement of a new year is for the best. The rest is best left to chance.
Renu Kohli is an economist with the Centre for Social and Economic Progress, New Delhi
