Number Theory: State of the economy, in five charts
The government will present the Economic Survey on the floor of Parliament on Tuesday.
The government will present the Economic Survey on the floor of Parliament on Tuesday. Tabled a day before the presentation of the Union Budget, the Economic Survey is the finance ministry’s annual compendium of stylised facts on the state of the economy as well as ideas which the Chief Economic Adviser’s (CEA) office wants to bring to the table. As a precursor to the Survey’s publication, here are five charts that summarise the state of the Indian economy.
Growth: what is the extent of the forthcoming slowdown?
While the Survey is largely a commentary on the year that was – the Survey will be for 2022-23 unlike the Budget, which is for 2023-24 – it does talk about the economy’s future growth prospects. For example, the previous year’s Survey pegged India’s real GDP growth at 8-8.5% in 2022-23. The National Statistical Office (NSO) has estimated India’s GDP growth to be 7% as per the first advanced estimates released earlier this month. To be sure, NSO’s estimates do not necessarily mean that the Economic Survey overestimated GDP growth in 2022-23 as actual GDP numbers for both 2020-21 and 2021-22 ended up being different from what the 2021-22 Survey had used. And last year’s Survey was drafted and presented well before the Russia-Ukraine war. With this caveat in place, it will be interesting to see the Survey’s growth rate predictions for 2023-24. Most institutional forecasts expect a deceleration in Indian economy’s growth rate in 2023-24. The World Bank’s latest Global Economic Prospects, for example, expects a 30 basis point – one basis point is one hundredth of a percentage point – reduction in real growth in 2023-24 to 6.6%. It needs to be underlined that India is expected to be the fastest growing major economy in both 2022-23 and 2023-24.
See Chart 1: Growth rate
But manufacturing is still struggling
In the Production Linked Incentive (PLI) scheme, the government has made a second attempt at its Make in India programme to boost manufacturing activity in the country. On February 27, HT reported that the PLI scheme may receive fresh allocation and expansion in terms of sectors covered in the forthcoming Budget. However, a look at the manufacturing component of Gross Value Added (GVA) for 2022-23 shows that manufacturing activity is still struggling in the economy. Manufacturing GVA is expected to grow at just 1.6% in 2022-23. When read with the fact that Purchasing Managers’ Index (PMI) for manufacturing has been the green for months – a PMI value above 50 signifies expansion in economic activity – the weakness in headline manufacturing sector growth numbers suggest that there is a divergence in the performance of organized and unorganized manufacturing firms.
See Charts 2A and 2B: Manufacturing GVA and PMI manufacturing
Inflation has come down, but the economy is facing a much higher interest rate environment now
Most of the assumptions in last year’s Economic Survey and the Budget were made redundant when Russia invaded Ukraine in February 2022. The war in Europe led to a sharp increase in prices of many essential commodities including crude oil and triggered supply chain disruptions. 2022-23 was the first year when RBI missed its official inflation target with the Consumer Price Index (CPI) staying above the 6% mark for three consecutive quarters. While inflation has moderated significantly and it is expected to reduce further, RBI has increased the policy rate significantly to boost the credibility of its inflation management role and prevent second round inflation spillover . With most analysts expecting another 25 basis point increase in the policy rate in the February meeting of the Monetary Policy Committee (MPC), the economy will be dealing with a much higher interest rate regime than it has in the recent past. This will add to growth headwinds on account of a slowing global economy.
See Chart 3: Inflation and policy rates
Will consumer sentiment turn positive in 2023-24?
This is the biggest challenge facing economic policy at the moment. RBI’s Consumer Confidence Survey (CCS) shows that the current situation index (CSI) has been negative for 33 consecutive rounds of CCS if one excludes the one-off positive blip just before the 2019 general elections in the March 2019 round of the survey. The weakness in consumer sentiment as seen in the RBI survey is in keeping with the pre-pandemic slowdown in the economy, the pandemic’s economic disruption, and anecdotal evidence of a K-shaped recovery after the pandemic. While consumer sentiment has been recovering, it still has to cover some distance to turn positive. For an economy where private final consumption expenditure has a more than 50% share in GDP, revival in consumer sentiment remains the key to boosting growth on a sustainable basis. To be sure, there is little the Survey can say or do to boost consumer sentiment and this is why all eyes will be on the 2023-24 Budget that will be presented on February 1.
See Chart 4: Current Situation Index of RBI