Decoding India’s economy and its impact on politics - Hindustan Times
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Decoding India’s economy and its impact on politics

Mar 04, 2023 06:53 PM IST

The economy faces 3 headwinds — the dissipation of pent-up demand; the slow-down in exports; and the possibility of another spring heatwave.

The National Statistical Office (NSO) released a set of Gross Domestic Product (GDP) numbers earlier this week. The most recent data, namely, GDP growth for the quarter ending December 2022, came at 4.4%. This is 30 basis points (0.3 percentage point) lower than what a Bloomberg poll of economists expected the number to be. NSO has retained a projection of 7% growth in 2022-23 between its first and second advance estimates, which means that GDP growth in the quarter ending March will have to be 5.1%. This goes against widespread opinion among economists that the Indian economy is losing, not gaining growth momentum at the moment.

At a time when government food stocks are running low, wheat inflation is trending above 20% and rural demand is going to be a key pillar of support for the economy, a sub-par crop will hurt. Then there is the threat of the 2023 monsoon being weak because of El Nino conditions. (Sameer Sehgal/HT Photo) PREMIUM
At a time when government food stocks are running low, wheat inflation is trending above 20% and rural demand is going to be a key pillar of support for the economy, a sub-par crop will hurt. Then there is the threat of the 2023 monsoon being weak because of El Nino conditions. (Sameer Sehgal/HT Photo)

The National Statistical Office (NSO) released a set of Gross Domestic Product (GDP) numbers earlier this week. The most recent data, namely, GDP growth for the quarter ending December 2022, came at 4.4%. This is 30 basis points (0.3 percentage point) lower than what a Bloomberg poll of economists expected the number to be. NSO has retained a projection of 7% growth in 2022-23 between its first and second advance estimates, which means that GDP growth in the quarter ending March will have to be 5.1%. This goes against widespread opinion among economists that the Indian economy is losing, not gaining growth momentum at the moment.

Is NSO’s estimation of the state of the economy off the mark? The answer to this question is slightly more complicated.

NSO’s latest data release includes other sets of GDP numbers as well. They include the first revised estimate for 2021-22, the second revised estimate for 2020-21 and the final estimate for 2019-20. It is not Chanakya’s intent to overwhelm the readers with bureaucratic processes involving the release of statistics, but these revisions to past GDP numbers have significantly changed the facts as far as the Indian economy’s performance is concerned. GDP growth rates for 2019-20, 2020-21 and 2021-22 have been revised upwards from the earlier figures of 3.7%, -6.6% and 8.7% to 3.9%, -5.8% and 9.1%, respectively.

The revisions have had an effect on the latest growth statistics as well. If the December 2022 quarter GDP was compared to the December 2021 GDP numbers before the latest revision, the economy would have shown an expansion of 5.1% instead of 4.4%. To be sure, there is nothing one can do about this problem of comparing hitherto revised statistics with one that will undergo a revision two years down the line. And while one can claim to be wise in hindsight, Chanakya believes that such large adjustments in a crucial economic indicator like GDP have a blindsiding effect on economic policy which ideally requires data in real-time. This is yet another addition to the list of challenges facing the Indian State as far as its statistical capabilities are concerned.

But deficiencies in our statistical system are a topic for another column; let us return to the state of the economy at the moment.

Any modern economy has its share of headwinds and tailwinds to growth at a given moment in time. What are the most pressing headwinds for the Indian economy right now?

First is the dissipation of pent-up consumption demand, which soared after being shackled due to pandemic-era restrictions. Private consumption is the single most important driver of the Indian economy. It had a share of 60% in total GDP in the December 2022 quarter. This is not to say that private consumption is going to plunge. In fact, analysts are still bullish about key consumer demand metrics such as car sales in the short run. However, it is unlikely to retain the same momentum. The monetary policy tightening resulting in higher EMIs for existing loans will also hurt here.

Second is the slowdown in exports. Advanced countries are bound to face an economic slowdown with an outright recession in some regions. This will hurt our export earnings and, therefore, demand which is financed by them. A research note published by CRISIL earlier this month noted that labour-intensive exports are likely to suffer more because of the global slowdown. This is bad news because it will hurt workers more, affecting their propensity to consume. To be sure, India has an in-built buffer when it comes to the economic impact of a global slowdown. A global slowdown, because its leads to a fall in commodity prices, especially that of crude oil, helps India which imports at least 80% of its energy requirements.

The third, and potentially most devastating, headwind to the Indian economy’s growth prospects is still up in the air. If March 2023 turns out to be as hot as March 2022, our wheat crop will suffer again. At a time when government food stocks are running low, wheat inflation is trending above 20%, and rural demand is going to be a key pillar of support for the economy, a sub-par crop will hurt. Then there is the threat of the 2023 monsoon being weak because of El Nino conditions. This will adversely affect both the kharif (lack of irrigation) and rabi (lack of water in reservoirs and low soil moisture) crops and, by extension, impact both inflation and rural demand.

Are there any tailwinds for the economy at the moment? There are, although most are more medium-term than short-term in nature.

As the 2024 elections come closer, the government is likely to double down on commissioning infrastructure projects. These will boost connectivity and thereby help businesses, especially in erstwhile less developed states such as Uttar Pradesh. One can also hope for some much-needed boost to manufacturing activity as more Production Linked Incentive (PLI) projects become operational. This is likely to boost export earnings as well as generate positive downstream spill overs. The PLI card, if it is played well, can help overcome global headwinds by bringing down imports as the value-added content in Indian manufacturing gradually increases.

Will the headwinds discussed here dominate the tailwinds or will it be the other way round?

The answer to this question will depend on the intersection of the meteorological climate with the political climate. If the Bhartiya Janata Party (BJP) does well in the state elections scheduled this year — it is off to a good start — it is unlikely to deviate from its economically prudent budgetary plan of cutting down on the fiscal deficit without compromising the capex push. A climate shock to farming will make this more difficult to sell politically and could lead to a higher fiscal deficit which in turn might disappoint private capital and investors. More than anything else, this could lead to subdued performance in capital markets which are anyway relatively overvalued vis-à-vis global standards.

In its nine years in office, luck has, by and large, favoured the current government when it comes to exogenous factors for the economy. Even when things have turned bad, they have corrected in time. It will be interesting to see if this pattern continues in the run-up to the 2024 elections.

letters@hindustantimes.com

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    History has an uncanny way of intruding into contemporary life and shaping our public conversation. A new controversy emerged recently over the relationship between Jawaharlal Nehru and Subhas Chandra Bose.

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