What do Q1 GDP numbers say about economic recovery?
Premium- There are several ways to look at and interpret the GDP growth in the first quarter
What do the GDP numbers for the first quarter released by the National Statistical Organisation on 31 August 2022, say about the health of the Indian economy? Do they confirm that the economy has recovered from the multiple shocks of Covid followed by the war in Ukraine and the resulting fuel crisis? Or is there reason to be more circumspect? A careful examination of the numbers suggests that the best verdict for now would be to emulate what the late Chinese Prime Minister, Zhou Enlai, is reported to have said when asked about the impact of the French Revolution: "It is too early to say!"
Yet, on the face of it, the GDP growth of 13.5% in the first quarter of 2022-23 is impressive by almost any yardstick. Juxtapose that number with the contraction in GDP witnessed in economies like the US and UK and the global contraction in growth reported by the International Monetary Fund in the July update of its World Economic Outlook and our performance looks almost stellar in comparison. It seems to vindicate claims of economic recovery (and by extension, the economic policies).
But on closer look, the numbers, particularly at the dis-aggregated level, when discounted for the base effect– the statistical bump-up caused by the fact that previous year’s numbers were abysmally low due to the ravages of covid on the economy–the picture looks less rosy.
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Not only was GDP growth in Q1 below most street estimates (that ranged between 15 and 16%), it was also below the Reserve Bank of India’s (RBI) own estimate of 16.2%. Sequentially, it is still below the level in the fourth quarter of 2021-22. More importantly, real output GDP (in constant 2011-12 prices) is only marginally above what it was three years ago, which means we have just about made up for the three years that we lost due to the pandemic.
True, Q1 numbers were adversely affected by the sharp increase in imports, due to the dramatic increase in oil prices following the war in Ukraine. This more than offset our good showing in exports. But even so, it is too early to claim that recovery is well and truly here.
More importantly, if the improvement is to be sustained and we are to achieve the 7.2 annual growth projected by the RBI, we cannot take recovery for granted. Of the four demand-side growth drivers–private consumption expenditure, government expenditure, exports and gross fixed capital formation–one, exports, can no longer be expected to play the role it did in shoring up growth in 2021-22, thanks to recessionary conditions in most of the advanced world that are bound to impact export demand adversely.
Private consumption is likely to remain subdued as job losses and high inflation dampen sentiment, though the festival months in Q2 might see some pick-up in demand. Private investment is yet to show a return of animal spirits, despite the huge reduction in corporate tax rates and slight improvement in capacity utilisation. That leaves government expenditure holding the can; once again. Though government capital expenditure has held up quite well so far, as at the end of July 22, capital expenditure was 27.8% of budget estimates as against 23.2% in the comparable period last year, the inevitable strain on government finances as oil prices continue to rule high is bound to constrain government ability to shore up the economy going forward.
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Sure, the share of gross fixed capital formation, a measure for investment, is a major driver of growth and jobs creation in the high-growth years. It has improved to 34.7% in Q1 FY 23 compared to 32.8% in the year-ago period. But it is only marginally above 34.6% in Q1 FY 20 (pre-covid), indicating just how much ground we still have to cover to return even to the growth trajectory of the already-slowing growth of the pre-covid years.
Meanwhile, gathering geopolitical tensions in the region and weakening of the rupee in response to a strengthening dollar will add to inflationary pressures, limiting the RBI’s ability to cut interest rates to support growth. As global central banks tighten monetary policy, the RBI, too, will have to follow suit, if not to the same extent. Inevitably, the trajectory of GDP growth will decelerate over the rest of the year.
The RBI estimates growth will slow sharply from 6.2% in Q2 to 4.1% in Q3 and further to 4.0% in Q4. Now that Q1 has come in below its estimates, the worry is that its estimates for the rest of the year too might also need to be revised down. The fact that we might still end the year as the fastest growing major economy is not good enough. The reality is that it will still be way below both our potential, and more critically, our need, if we are to lift all our people out of poverty.
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