The Economic Survey’s growth forecast is a little too optimistic

This is expected to follow 2022-23’s 7% growth, as per the first advance estimate. The survey notes that the Indian economy “appears to have moved on after its encounter with the [covid] pandemic", despite the challenge of high inflation along with the war in Ukraine.

This recovery is thanks to three major factors: a rebound in private consumption aided by a release of “pent-up" demand, a surge in exports in the initial months of 2022-23, and the increase in government capital expenditure.

Further, the survey notes that “the pent-up release of demand will have a finite life" and export-growth is plateauing. So, two of the three factors will not be able to do the same heavy-lifting.

In fact, private consumption has more problems. First, growth in it has come at the cost of falling household financial savings. Estimates made by economist Nikhil Gupta of Motilal Oswal suggest that net household financial savings “plunged to a three-decade low of about 4.0% of GDP" during the first half of 2022-23. This is around half of the household financial savings (flow) of 8.1% during the pre-covid year of 2019-20. If savings go up to 7-8% of GDP through 2023-24, it will slow down the growth of private consumption.

Second, the economy has seen a K-shaped recovery, which is visible through different data points. Two-wheelers, as the Economic Survey points out, have “witnessed the lowest sales in the last ten years". Two-wheelers are probably the second- or the third-most expensive thing that individuals buy during their lifetime. The current low appetite for them suggests that sections of the population aren’t doing well on the income front.

Further, the rural economy, despite some improvement, isn’t out of the woods yet. The work demanded by households under the Mahatma Gandhi National Rural Employment Guarantee Scheme in 2022 was 26% higher than in 2018 and 17% higher than in 2019. Clearly, our rural economy is struggling, even though the work demanded in 2022 was 15% lower than in 2021.

Also, data from the annual Periodic Labour Force Survey 2020-21 tells us that India’s labour force participation rate has risen, suggesting some economic recovery. Nonetheless, almost all this increase is thanks to higher farm employment. Economic history suggests that as countries develop, their workforces move away from agriculture into more productive jobs in manufacturing and construction. Further, there is huge disguised unemployment in agriculture.

Another factor that has negatively impacted consumption in rural areas is high inflation. Comments from senior managers at Hindustan Unilever Ltd (HUL) in their most recent earnings call suggest that the worst might be over. Nonetheless, as Sanjiv Mehta, its chief executive officer and managing director put it, “We are not jumping to [a] conclusion that everything is hunky-dory." All these factors are likely to hold back fast private consumption growth in 2023-24.

When it comes to exports, there are three factors at play. First, rich-world central banks are likely to keep raising interest rates, at least through the first half of 2023-24. While inflation has come down, it is still nowhere near their targeted 2%. Second, these central banks have been gradually withdrawing the money they had printed and pumped into the financial system. This will keep long-term interest rates high and discourage consumption, hurting their imports and our exports. Third, a major reason for the jump in consumer demand across the rich world was the fact that the money printed was indirectly handed over to governments. They deposited that money into the bank accounts of people. This pushed up consumer demand in 2020 and 2021, but this isn’t going to happen anymore.

So, what needs to be done? The survey suggests that “it is essential that [capital expenditure] continues to grow to facilitate employment, at least until such time the global economy rebounds". As per the International Monetary Fund’s World Economic Outlook, global growth will slow to 2.7% in 2023 from 3.2% in 2022. The World Trade Organisation forecasts that growth in global trade will slow to 1% in 2023 from 3.5% in 2022.

Hence, as per the survey, “the private sector has all the necessary pre-conditions lined up to step up… and do the [capital expenditure] heavy lifting". This is true to some extent. The balance sheets of companies and banks are better than they were in the past.

Nonetheless, private corporations tend to invest when they expect strong and robust consumer demand. As explained earlier, there are quite a few factors that are likely to hold back demand growth in 2023-24. In this scenario, chances are that private firms will not do the expected heavy lifting. Of course, they will invest more than they did during the covid years.

Hence, as has been the case over the last few years, India’s government will have to do the heavy-lifting on capital expenditure, which is constrained by fiscal deficit limitations. That’s the most likely scenario. And given that, growth is more likely to be in the range of 5-6% than exceed 6% as the survey expects.

Vivek Kaul is the author of ‘Bad Money’.