GDP grows 8.7% in 2021-22 but there’s little to celebrate in that
The interesting thing is that the quarterly GDP growth has fallen dramatically through 2021-22. Growth during April-June 2021 had stood at 20.1%, falling to 8.4% in July-September and further to 5.4% during October-December.
India's real gross domestic product (GDP) growth in 2021-22 was 8.7%. The GDP is a measure of the size of an economy during a particular year, and GDP growth is a measure of economic growth. An economic growth of 8.7% after adjusting for inflation sounds pretty good on its own, until we take the base effect into account. The GDP in 2020-21 had contracted by 6.6%.
Hence, for a fair comparison, we need to compare the GDP of 2021-22 with the pre-pandemic GDP of 2019-20. The GDP in 2021-22 was at ₹147.35 trillion, which is just 1.5% more than the GDP of ₹145.16 trillion achieved in 2019-20.
In that sense, we have barely managed to come out of the negative economic impact of the covid-pandemic. In fact, this can be clearly seen in the private consumption expenditure, which more than half of India's GDP. Private consumption is the money you and I spend on buying things.
Private consumption expenditure in 2021-22 stood at ₹83.78 trillion, which was barely 1.4% above the private consumption expenditure of ₹82.60 trillion in 2019-20. Other than the negative economic impact of the pandemic, the high inflation over the last two years has also had a negative impact on consumption. Retail inflation between March 2020 and March 2022 has averaged at 5.8% per year.
In fact, even the 1.4% growth is on account of the increase in population over the last two years. Once we adjust for that, the per capita private consumption expenditure has fallen by 0.6% to ₹61,215, over the two-year period.
This is in the line with the recent analysis of the Reserve Bank of India in its Report on Currency and Finance, where it said, “India is expected to overcome covid-19 losses in 2034-35. The output losses for individual years have been worked out to ₹19.1 trillion, ₹17.1 trillion and ₹16.4 trillion for 2020-21, 2021-22 and 2022-23, respectively."
Clearly, the Indian economy is going to take time to come out of the negative economic impact of the pandemic. Also, GDP data for 2021-22 barely takes into account the negative impact of Russia’s attack on Ukraine. Russia attacked Ukraine on 24 February, sending global commodity prices soaring to even higher levels. Russia is a big exporter of commodities like crude oil, natural gas, fertilizers, sunflower oil and coal. India imports a huge amount of these commodities.
The negative impact of this can be seen in the GDP growth of 4.1% between January to March. The interesting thing is that the quarterly GDP growth has fallen dramatically through 2021-22. Growth during April-June 2021 had stood at 20.1%, falling to 8.4% in July-September and further to 5.4% during October-December.
A major reason for this is the increase in inflation which has had a negative impact on private consumption. In fact, private consumption during January to March 2022 was just 1.7% higher than private consumption between January to March 2021. This, when retail inflation between January to March averaged at 6.3%. It was at a much higher 7.8% in April, suggesting that things are likely to get worse on the growth front.
Retail inflation has been in single digits despite wholesale inflation remaining in double digits since April 2021. The difference between the two rates of inflation has come down over the months. It peaked at around 10% in November and has come down to 7.3% in March, implying that companies are now passing on the higher cost of raw materials to their end consumers, in the form of higher prices for products and services.
This inflation is already hitting consumers badly. As Hindustan Unilever, one of the biggest FMCG companies in India, recently said: “Due to unprecedented inflation, FMCG market… has significantly slowed down and volumes are declining in high single digit. The impact is more pronounced in rural [markets]... Consumers are tightening volumes and essentials are being prioritized over discretionary categories." Volumes declining refers to consumers not buying as many units of different products as they did in the past.
This implies that inflation will continue to negatively impact consumption and hence, drive down economic growth in the current financial year, at least as long as the war in Ukraine continues. It won’t be a surprise if economic growth in 2022-23 ends up being significantly lower than in 2021-22.
