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On Wednesday, data released by the National Statistical Office showed that the Indian economy grew at 13.5 per cent in the first quarter of the ongoing financial year. This seemingly strong number which is driven by a favourable base effect — economic activities were severely impacted by the Delta wave of the pandemic in the first quarter of the last financial year — is, however, below expectations. In its most recent update, the Reserve Bank of India had pegged growth for the quarter at 16.2 per cent. This also implies that the central bank has been overestimating the growth momentum in the economy. It is also a sign of concern that despite a double-digit growth, gross value added (which strips away indirect taxes and subsidies) has grown by a mere 4.7 per cent over its pre-pandemic level, the first quarter of 2019-20.

The disaggregated data shows that value added by the agriculture sector grew at a healthy 4.5 per cent in the first quarter, notwithstanding the impact of the heat wave. Going forward, though, the unevenness of the monsoon could adversely impact output and as a consequence may have a bearing on rural demand. Within industry, manufacturing grew at a disappointing 4.8 per cent, and while construction activities grew at 14.7 per cent, growth over the sector’s pre-pandemic level was anemic. Across the services sector, trade, hotels, transport and communication continue to be points of concern, remaining well below their pre-pandemic level, while on the expenditure side, even as government spending was muted, both private consumption and investments registered strong growth.

As the base effect normalises in the coming quarters, GDP growth will begin to moderate. In its most recent update, the RBI had also alluded to this trend. The central bank had pegged economic growth to slow down from 16.2 per cent in the first quarter to 6.2 per cent in the second quarter, and further to around 4 per cent in the second half of the year. Now, there are considerable downside risks to even these forecasts. As central banks across much of the developed world continue to focus on tackling inflation, tightening financial conditions and weakening global demand will impact economic prospects. Exports will be impacted, notwithstanding the rupee’s decline, as demand in developed markets shrivels. Domestic private consumption is likely to remain constrained as wage growth, especially in rural areas, remains muted. Some sectors with higher capacity utilisation rates may see fresh investment, though a broad-based pick-up in the private investment cycle seems unlikely to materialise in the near term. This leaves the burden of driving growth on government, which is constrained by its finances.