India’s economy pegged to grow at 7.3% this year | Latest News India - Hindustan Times
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India’s economy pegged to grow at 7.3% this year

By, Rajeev Jayaswal, New Delhi
Jan 06, 2024 06:02 AM IST

The Indian economy is expected to grow at a rate of 7.3% in the fiscal year 2023-24, surpassing earlier forecasts by the IMF, RBI, and research firms. The growth is driven by government investment and spending, making India the world's fastest-growing major economy. However, concerns remain about the low private consumption growth and the tepid nominal GDP growth, which could impact tax collections and fiscal deficit. The sector-wise breakdown shows an increase in manufacturing, while agriculture and trade sectors have seen a decline in economic momentum.

The Indian economy will grow at 7.3% in the fiscal year 2023-24 according to the first advanced estimates released by the National Statistical Office (NSO) on Friday -- a number that is a full percentage point higher than the International Monetary Fund’s October forecast of 6.3%, and also higher than estimates put forth by the Reserve Bank of India and many research firms.

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While experts have flagged technical issues related to price adjustment leading to some statistical noise in the GDP numbers, better than expected growth data ahead of the interim budget and months before the 2024 general election process begins will give a big boost to the government’s economic narrative. The growth, powered by government investment and spending, will make India the world’s fastest growing major economy by a bit.

A 7.3% GDP growth rate for the fiscal year 2023-24, when read with a 7.7% growth in the period between April and September – GDP growth was 7.8% and 7.6% in the quarters ending June 2023 and December 2023 – means that the Indian economy is expected to grow at 7.3% in the period between October 2023 and March 2024. This is significantly higher than RBI’s December projection of 6.5% and 6% GDP growth in the quarters ending December 2023 and March 2024.

What explains this impressive performance by the Indian economy in 2023-24?

It is useful to begin answering this question with what does not. Private Final Consumption Expenditure (PFCE) – it accounts for 58% of total GDP in 2023-24 – growth in 2023-24 is expected to be just 4.4%. If one were to exclude the 2020-21 contraction on account of the pandemic and the lockdown, 2023-24 PFCE (a measure of consumption) growth is the lowest since the 2.9% print in 2002-03 according to data from the Centre for Monitoring Indian Economy (CMIE). PFCE growth in 2022-23 was much higher at 7.5% despite a high base of 11.2% in the previous year. More than anything, this shows that mass consumption is not driving India’s current extraordinary boom and underlines the concerns around what many economists have termed a K-shaped recovery in the economy.

On the other hand, Government Final Consumption Expenditure (GFCE) growth has increased from 0.1% in 2022-23 to 4.1% in 2023-24. Gross Fixed Capital Formation (GFCF) -- it measures investment spending -- has continued to grow in double digits for the third consecutive year, even though the momentum has come down from 11.4% in 2022-23 to 10.1% in 2023-24. Much of this is expected to have come from government’s infrastructure spending rather than private sector.

The relative importance of private and public spending’s contribution to the economy becomes clearer if one looks at the contribution of PFCE and GFCE and GFCF combined to overall GDP growth in 2023-24. PFCE’s contribution to GDP growth was 35.4% despite it having a share of 58% in total GDP, whereas GFCE and GFCF combined had a contribution of 53.2% in growth with a combined share of just 44% in the overall GDP.

As far as the sector-wise break up of growth is concerned, manufacturing has seen the biggest increase, with the number jumping from 1.3% in 2022-23 to 6.5% in 2023-24. Two of the most important sectors of the economy from the perspective of employment, Agriculture and Trade, Hotels, Transport, Communication & Services related to Broadcasting have seen a fall in economic momentum with 2023-24 growth numbers being 1.8% and 6.3% respectively compared to 4% and 14% in 2022-23. To be sure, sector-wise numbers such as those for manufacturing, might have statistical noise because of technical issues around deflators. For example, real manufacturing growth in 2023-24 is expected to be higher than the nominal growth number of just 4.4%.

Economists have flagged this issue. “We forecast GDP to grow by 6% y-o-y in FY25, versus 6.9% in FY24. Much of this fall is likely to be led by statistical reasons, for instance normalising deflators. As such, actual growth on the ground may not soften by as much”, HSBC Chief India Economist Pranjul Bhandari wrote in a note on January 3.

The only cause for concern in the otherwise exuberant GDP numbers is the tepid nominal GDP growth. At 8.9%, nominal GDP growth for 2023-24 is 1.6 percentage points lower than the 10.5% number which was the premise of the 2023-24 Union Budget. In absolute terms, the first advanced estimates predict nominal GDP to be 296.6 lakh crores while the 2023-24 Union Budget assumed this number to be 301.8 lakh crore. The nominal GDP number matters because it is the base for tax collections and a shortfall on this account can lead to a shortfall in revenue and lead to the fiscal deficit ending up higher than what the government expects it to be. Having said that, whether this lower-than-expected nominal GDP number is just a deflation related issue or could actually drag down tax collections remains to be seen and it is a question which will only partly be answered when the Revised Estimate numbers for 2023-24 are issued in the Interim Budget on February 1. To be sure, revenues might also have tailwinds such as high corporate profits. “In fact, on the back of falling input prices, producers have been able to do both - cut output prices while still holding on to elevated corporate profits. This rare coexistence, of falling core inflation and rising GDP growth, was arguably at the heart of India’s strong macroeconomic performance in 2023. By that logic, how it shapes up in 2024, will depend a lot on where commodity prices land”, Bhandari wrote in her research note.

“The first advance estimates of FY24 show no let up in growth momentum in the economy. Resilience and strength of the economy underpinned by reforms of the last nine years have laid the foundations for the economy to sustain a healthy growth rate in the coming years,” Union finance ministry said in a post on X, formerly Twitter.

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