Four charts on the state of the Indian economy
- While the MPC has projected real GDP growth at 10.5% in 2021-22, the Budget assumes nominal growth of 14.4%. What exactly is the state of the Indian economy?
Last week saw the presentation of the 2021-22 Union Budget and the first Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI) in 2021. Both the Budget and the RBI see the economy on a path of strong recovery, with GDP growth expected to be in double digits in 2021-22. While the MPC has projected real GDP growth at 10.5% in 2021-22, the Budget assumes nominal growth of 14.4%. What exactly is the state of the Indian economy? Are there more tailwinds than headwinds to growth going forward? Here are four charts that can help answer the question better.
1) India is experiencing a better-than-expected recovery in its economy
Optimism about India’s economic prospects is not limited to the MPC or the Budget. This is a sentiment shared by most forecasts, both private and institutional. The latest World Economic Outlook (WEO) projections released by the International Monetary Fund (IMF) in January – these are revisions to the October 2020 numbers – are a case in point. The January projections expect India to grow 11.5% in 2021, 2.7 percentage points higher than the 8.8% forecast in October.
The WEO database gives data for 20 countries. If one were to calculate growth in GDP over the 2019 GDP levels in 2022, then India is ranked fifth on the list.
2) Centre’s spending boost, but state spending losing momentum?
One of the key aspects of the 2021-22 Budget has been that central government spending has gone up significantly in 2020-21 and is expected to remain at those levels in 2021-22. Both in 2020-21 and 2021-22, capital spending had a bigger focus in central expenditure. Does this mean an unambiguous spending push by the state? The difficult fiscal situation of the states might have prevented this from happening. Cumulative data from the Controller General of Accounts (CGA), which works under the ministry of finance, and the Centre for Monitoring Indian Economy (CMIE) clearly show this.
While the Centre had spent more on both capital and revenue accounts until December 2020 than what it had until December 2019, 13 states for which data is available up to December 2020 show a fall in both revenue and capital spending compared to the previous year.
3) Mismatch between business and consumer sentiment
Among biggest determinants of growth going forward will be economic sentiment of both businesses and consumers. Unless businesses believe that the economy is going to be doing well in the future, they would not make fresh investments, which are crucial for future increases in output and employment. To be sure, business sentiment would need to be complemented by strong consumer sentiment, failing which aggregate demand will not pick up and drag investment and output down eventually. It is on this front that the economy continues to remain weak. A section of the economy, more likely the rich, is oozing exuberance about its future prospects. This is best captured by the price-earnings multiple in the stock market continuing to rise.
However, a very large section is still bogged down by low incomes and reduced employment opportunities, as seen in the RBI’s latest consumer confidence survey. Such a mismatch could create economic uncertainties going forward.
4) What are the prospects of rural demand going forward?
Agriculture is the only sector which has escaped a contraction in 2020-21. This also ensured that rural demand did not collapse at a time when the economy was mired in a deep crisis. That food inflation was at historically higher levels for most of 2020 also helped in supporting rural demand by tilting what is referred to as the terms of trade in favour of agriculture. This seems to be changing now. Food inflation collapsed in December 2020 and is expected to remain at lower levels, thanks to bumper production of kharif crops and seasonal vegetables. Non-food prices, however, are likely to regain momentum, so much so that the MPC has listed them as an important source of tailwinds to overall inflation in the first half of the next fiscal year. If this were to happen indeed, rural demand could suffer, thanks to a relative loss in purchasing power.
To be sure, the net effect of this movement in price ratios will depend on whether or not income and employment improve for the non-farm, blue collar workforce, which also spends a large part of the household budgets on buying food. A strong revival of the non-farm economy could compensate for any loss in rural demand due to a worsening of the terms of trade.