Can the Indian economy sustain its momentum?

From 2019 to 2023 growth in agriculture (3.5%) outpaced growth in manufacturing (2.4%) as the covid lockdowns covered factories but not farms (Photo: AFP)
From 2019 to 2023 growth in agriculture (3.5%) outpaced growth in manufacturing (2.4%) as the covid lockdowns covered factories but not farms (Photo: AFP)


  • Policymakers must urgently focus on reviving manufacturing if the impressive growth is to be maintained

There’s cheerful news on the economy at last. Official estimates released last week show India’s GDP grew 6.1% in the fourth quarter of 2022-23 (FY23). The higher-than-expected growth lifted the full-year growth to 7.2%, rendering almost all projections pessimistic, including those of the Reserve Bank of India (RBI), which had predicted 6.8% growth.

Analysts are pleasantly surprised as the year saw high inflation, which forced the central bank to raise interest rates sharply, and a rise in uncertainty owing to the war in Ukraine. The 7.2% growth in FY23 came after 9.1% growth in FY22.

Many factors boosted growth in the fourth quarter of the year. The full-year growth was led by agriculture, which delivered extremely strong growth of 5.5% year-on-year in the quarter. It seems that bumper output in Madhya Pradesh may have more than made up for crop losses, if any, in Punjab and Haryana due to excess unseasonal rains there.

Second, exports of services were buoyant and net exports contributed as much as 1.4 percentage points to the overall growth figure, helped by a contraction of 4.1% in imports, which contributes positively to GDP growth.

Third, the output of both passenger and commercial vehicles grew smartly, recovering from the chips-shortage crisis. Fourth, air and rail traffic rebound sharply, led by the pent-up, post-lockdown demand for travel.

Fifth, the government’s sustained capex push in the union budget boosted the output of construction-related sectors such as steel and cement. Estimates show that gross fixed capital formation, an indicator of investment demand in the economy, grew 8.9% during the fourth quarter.

Sixth, financial services performed well with post-covid revival of bank credit. In fact services, construction, trade, hotels, finance and real estate all grew faster than projected, likely on the strength of pent-up demand. Seventh, the sharp fall in crude oil prices (trending below $73 a barrel) likely boosted economic activity.

Finally, the growth figures were no doubt helped by a low statistical base from the peak covid-19 year. Experts have also ascribed part of the buoyancy to methodological issues proving favourable – such as the Central Statistical Organisation’s (CSO) use of single deflation rather than double deflation, which, they reckon, tends to lead to overestimation in growth during times of falling oil prices. (While the output and the inputs that go into production are deflated with their respective prices in other countries, in India, due to the paucity of price indices, both are deflated with just the output deflator, which creates a bias in times of sharp price movements.)

But these issues should not make us overly sceptical for two reasons: one, the methodology, with all its shortcomings, is followed consistently by the CSO. Second, the estimates are provisional and over the next two years will be refined by the CSO as per its policy.

In conclusion, while the economy has rebounded from the shock of covid-19, the key concern now is whether the fast growth is sustainable. Most economists project a slowdown in the momentum in FY24. This is because a red flag tempering the good news for the fourth quarter is the tepid 2.8% year-on-year growth in private consumption, which could be a sign of a slowdown in response to the RBI’s monetary tightening.

It’s early days, though, and the revisions to this figure will have to be monitored. This is important because private consumption will eventually determine private-investments growth, which is key for job creation.

The emerging global economic conditions will remain an important determinant along with the monsoon and other climate-related variables. But it cannot be understated that the biggest effect may come from policy responses. Sound policies will help the economy sustain its momentum.

The released growth estimates (subject to revisions, as already noted) confirm that covid-19 delivered a major shock to the economy. The compound annual growth rate (CAGR) from 2019 to 2023 is just 2.7%.

The impact of the lockdowns policy can also be seen from the estimates. Growth in agriculture (3.5%) during this period outpaced that in manufacturing (2.4%) as the lockdowns covered factories but not farms. Higher-quality GDP growth would have been possible if manufacturing GDP had performed as well as agriculture, given the implications for job creation and consumption demand.

FY23 manufacturing growth is estimated at 1.3%. Reviving this sector is something policymakers must focus on urgently if India’s impressive economic growth momentum is to be maintained.

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