E-Paper
Three charts which explain the state of the Indian economy
Are the June 2022 GDP numbers good or bad? What do they mean for economic growth over the rest of the fiscal year? What is the current state of economic momentum in the Indian economy? What about the nature of economic recovery?
The Indian economy grew at 13.5% on a year-on-year basis in the quarter ending June 2022. While the headline number looks good, and is the fastest rate since June 2021, it was significantly lower than the 16.2% projection made by the Monetary Policy Committee (MPC) of the RBI in August. Most independent economists now expect the Indian economy to grow at a slower pace than the 7.2% forecast of the MPC.
So, are the June 2022 GDP numbers good or bad? What do they mean for economic growth over the rest of the fiscal year? What is the current state of economic momentum in the Indian economy? What about the nature of economic recovery? Here are three charts which try and answer these questions.
GDP numbers should not be read without discounting the base effect
Is it correct to see the June 2022 GDP growth as remarkably high, given the fact that GDP growth figures are rarely in double digits? The short answer is, it is not. The latest GDP numbers have a strong base effect which has artificially bloated the annual growth numbers. India’s GDP fell by 23.8% on an annual basis in the June 2020 quarter due to the 68-day lockdown which was imposed on March 25, 2020. While economic activity started recovering as restrictions were eased – the economy came out of contraction mode in the third and fourth quarter of 2020-21 – the second wave of the pandemic inflicted a huge disruption on the economy once again in the quarter ending June 2021. This meant that despite an annual growth of 20.1%, GDP was 8.5% lower than the pre-pandemic level during this period. This low base has given an artificial boost to the annual growth number for the June 2022 quarter. Quarterly growth projections by the MPC show that the headline growth number is expected to come down with moderation of the base effect in the successive period.
What is the nature of economic momentum after the quarter ending June 2022?
We are now in the last month of the second quarter of fiscal year 2022-23. GDP numbers for the September 2022 quarter will only be released in the end of November? What do we know about economic momentum after the June 2022 quarter? While there is no substitute for GDP data, we do have high frequency indicators to give an idea about the state of the economy after June 2022. The picture is mixed. If one looks at the Purchasing Managers’ Indices (PMI), the situation looks good. PMI manufacturing came in at 56.4 and 56.2 in the months of July and August. Not only are these numbers comfortably above the psychological threshold of 50 which signifies expansion in economic activity over the previous month, they are also higher than the monthly values in April, May and June 2022. PMI services stood at 56.6 in July, lower than the individual monthly readings in the June 2022 quarters. The PMI services reading for August will be released on September 5. The index of eight core sector industries, data is available in this series till July, shows a moderation in annual growth from 9.5%, 19.2% and 13.2% readings in April, May and June to just 4.5% in July. While the core sector numbers do show a sequential moderation in absolute terms, the decline in annual growth in July is also driven by dissipation of base effect in the June quarter due to the second wave of the pandemic. Simply put, there is nothing to suggest that economic momentum was weakened significantly. However, it needs to be kept in mind that high frequency indicators mostly capture formal sector activity.
K-shaped recovery becoming entrenched?
This, more than anything else should be the biggest cause of concern. Because of deep inequality, the rich are disproportionate contributors to economic growth in India. Has this disproportionality increased in the post-pandemic phase? There is prima facie evidence to suggest that it has. Data from the Periodic Labour Force Survey shows that construction and trade, hotels, transport, storage and communication sub-sectors of the economy employ around 30% of Indian workers. These two sub-sectors have shown the weakest recovery in terms of Gross Value Added from pre-pandemic levels in 2020-21 and 2021-22, and worryingly the trend continues even in the June 2022 quarter. Unless the economy finds a way to rejuvenate growth in the employment-intensive non-farm sectors, or generates remunerative jobs for those employed here in other parts of the economy, fruits of the post-pandemic recovery will continue to elude a large part of the population. This is bound to generate headwinds for medium to long-term growth, which can strengthen sooner rather than later given the global growth headwinds.
