7.2% GDP growth! Let’s not over-celebrate

On a projected growth of 6% in FY24, India’s growth will be less than 4% in BJP’s current term, which is not something to drum up about

The National Statistical Office (NSO) estimated 2022-23 GDP growth at 7.2 per cent, better than 7 per cent estimated in January. The Chief Economic Advisor (CEA), anticipating higher growth, termed it “world-beating” before the numbers were released. There is understandable chest-thumping in circles closer to the government. The annual growth at 7.2 percent and Q4 growth at 6.1 percent certainly make one feel good, especially in the context of a slowing global economy.

When you put this performance in the larger context — compounded growth (CAGR) over 2018-19 — the story does not appear that uplifting. India’s 4-year GDP CAGR in 2022-23 is only 3.42 per cent. Building on a projected growth of 6 per cent in 2023-24, India’s growth will be less than 4 per cent in the current term of the government. Considering India’s low per capita GDP, this is a very poor performance. Should the celebrations dial down a bit?

A deeper story is unfolding in the sectoral growth data. Let me go into the internals of sectoral 2022-23 gross value added (GVA) and expenditure data to get a better sense of whether we are out of woods.

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A Low-growth Groove

Overall, the GVA growth for 2022-23 is 7 per cent.

Three sectors — agriculture, utilities, and financial services, which were, by their very nature, structure and pandemic neutrality not impacted by the Covid-19 — recorded a GVA growth of 4 per cent, 9 per cent, and 7.1 per cent respectively in 2022-23. This steady-state performance is in line with their GVA growth in 4-years since 2018-19 of 4.6 per cent, 4 per cent, and 5.2 per cent respectively.

Three sectors — manufacturing, construction, and public administration, which had suffered convulsions on account of the Covid-19 — recovered to surpass their 2018-19 GVA levels by 2021-22, registering growth of 3.5 per cent, 3.2 per cent, and 2.6 per cent respectively. In 2022-23, manufacturing has grown by 1.3 per cent only, bringing the 4-year GVA growth down to 3 percent. Construction has recorded a massive growth of 10 per cent raising the 4-year CAGR to 4 per cent. Public administration recorded a 7 per cent growth raising the 4-year CAGR to 3.7 percent. There is continued logjam in manufacturing, and construction remains volatile.

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The remaining two sectors — mining and trade & commerce — suffered massively on account of Covid-19 and had not recovered to their 2018-19 levels by 2021-22 registering a 3-year negative growth of -1.7 per cent and -1.1 per cent respectively. The mining sector is still in the red despite a 4.6 per cent growth in 2022-23. The trade sector did phenomenally well in 2022-23 with all Covid-19 restrictions and inhibitions gone, recoding a fabulous growth of 14 per cent. This has brought the 4-year CAGR of trade sector to positive territory of 2.5 per cent growth.

The message from a sectoral GVA analysis is quite clear. Agriculture and utilities are likely to record their normal low growth of 3-4 per cent annually. Trade, financial services, and public services are also back in their groove and are likely to record their normal growth of 5-8 per cent. Manufacturing and construction have become quite volatile. Covid-19 disruptions and government capex-induced bump in their growth is unlikely to sustain. The mining sector is in long-term sclerosis and will hardly contribute to meaningful growth.

It will be reasonable to expect a low 5-6 per cent GVA growth in 2023-24.

Persisting Misery

People’s consumption, represented by the private final consumption expenditure (PFCE), grew by 7.5 per cent to reach Rs 93.59 lakh-crore in 2022-23. The PFCE growth, over the last four years, however, is only 4.5 per cent. Even assuming consumption is evenly spread, which certainly is not the case, 4.5 per cent indicates very low improvement in quality of life. Q4 consumption growth has been very muted at 2.5 per cent. Inflation continued to buffet people in 2022-23. The PFCE, at current prices, grew by a whopping 15 per cent.

The government expenditure on current consumption, represented by the government final consumption expenditure (GFCE) numbers, captures the story of the government’s stinginess. The GFCE remained almost flat in 2022-23 (Rs 15.77 lakh-crore versus Rs 15.75 lakh-crore in 2021-22) bringing down the 4-year growth to only 2.4 per cent. The government certainly has remained quite tight-fisted, except for capex which, as the data suggest, did not help in improving consumption standards of people.

I doubt if the PFCE growth will sustain at 7.5 per cent next year.

Faster Recovery in Capital Formation

The Gross Fixed Capital Formation (GFCF) captures growth in fixed investment and capital formation.

The GFCF grew by decent 11.4 per cent in 2022-23, primarily led by a government capex push. The GFCF 3-year CAGR in 2021-22 was a pathetic low of 2.4 per cent, which has now improved to 4.6 per cent. This is not a great number for India’s growth needs, but the improvement in 2022-23 is impressive.

The government has pushed capex on the back of high fiscal deficits, which cannot be raised further. With moderation in corporate profits, inflation and imports, the government’s gross tax revenues are likely to witness a single-digit growth in 2023-24. It will find it difficult to give further leg-up to capex bringing the GFCF growth to lower levels.

Not Out of Woods

We can rejoice at a 7.2 per cent GDP growth in 2022-23. This, however, still reflects largely the recovery bump-up from the depths of contraction in 2020-21.

Sectoral growth, consumption, and capital formation trajectories indicate that we are getting into the low-growth groove of 5-6 per cent in the times to come unless drastic reforms and course corrections are made.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘Explanation and Commentary on Budget 2023-24’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.