Home / Opinion / Views /  GDP data has a pointer for India’s budgetary direction

India’s real gross domestic product (GDP) grew by 6.3% during the July-September quarter of 2022-23 (FY23), in line with some forecasts, but was undergirded by the sense of an impending slowdown. Coming soon on the heels of finance minister Nirmala Sitharaman wrapping up her pre-Budget consultation meetings with different stakeholders, the data provides a pointer to the desired direction for India’s FY24 Budget.

Unpeeling the real GDP growth number of 6.3%, five data points hold interesting insights. First, consumption is waxing and waning, failing to provide the required growth impetus. The print for private final consumption expenditure (PFCE) came in slightly underwhelming at 9.7%. When combined with government final consumption expenditure, which contracted by 4.4%, the overall contribution of consumption growth to GDP growth is considerably muted. While it is true that Q2 data might be reflecting a seasonal expenditure lull, it is equally distressing to note that the pursuit of deficit management might have also contributed to government expenditure contracting, which could have led to the overall consumption slowdown. The Centre’s revenue expenditure, excluding interest payments and subsidies, contracted by more than 13% during the quarter in comparison with spending during the same quarter of FY22. Deficit discipline is desirable, but the timing should also be appropriate, given that the economy is yet to recover fully from the pandemic’s ravages.

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There could be another reason for the slowdown. Data from the Controller General of Accounts till September 2022 shows that the Centre transferred only 24% of the 334,339.42 crore budgeted for states under finance commission grants, other grants, loans and transfers—only 33% on the revenue account and, sadly, only 5% under the capital account.

The second data point is a structural infirmity which may partially explain the consumption inertia: a pervasive slowdown in manufacturing. The ministry’s gross value added data shows manufacturing underwent compression by 4.3% in Q2FY23, while the index for industrial production (which includes mining and power generation) shows a growth of only 1.4% during the same period. Clearly, government incentives over the past few years—namely, lower corporate taxes and the production linked incentive (PLI) scheme—have not yielded the desired results. While there is some hope that production would have picked up in the October-December quarter, along with the upswing in festival-induced consumption demand, there are concerns whether some embedded structural weaknesses are hindering manufacturing growth. Indian industry’s drag on the macro figures over the past few quarters remains a source of disquiet.

One of the reasons for manufacturing sluggishness can be found in sub-par export growth of around 12% (the third data point), slower than the 25% growth in imports. The global economic slowdown is expected to further depress demand for Indian exports in the next few months, thereby putting additional pressure on consumption and production data. PFCE of 9.7%, despite shrinking manufacturing, seems to suggest that imports are filling the demand-supply gap. Interestingly, only two items account for almost half the import bill: petroleum and petro-products, and, a catch-all category that includes bullion, precious and semi-precious stones and pearls.

The private-sector lag becomes even more worrisome when we look at the fourth data point in the Q2FY23 data. Gross fixed capital formation, exhibiting a growth of 10.4%, provided the only bright spot in the otherwise disappointing data print. This is clearly a reflection of the government’s emphasis on higher capital expenditure in the hope of rousing dormant private sector investment and thereby economic growth. However, private sector investment propensity has remained steadfastly low despite the government’s front-loading of investment, tax and non-tax incentives, and a prolonged period of historically low interest rates allowing companies to deleverage their balance-sheets.

The fifth data point is a joker in the pack called “Discrepancies" which has contributed 2.9% to GDP, perhaps an all-time record. Discrepancies arise when data between GDP estimates from the production approach and the expenditure approach are misaligned. Such a high level of discrepancy implies that GDP for the second quarter is perhaps a bit lower than its print and revisions can be expected in the future. However, it is difficult to state which specific component is expected to be revised in the future.

So, what does this mean for FY24’s Union Budget? Two lessons clearly stand out.

One, the government’s current capital expenditure momentum has to continue because it is clearly one of the growth engines firing at the moment. With Indian private industry remaining mostly unresponsive, the other lever available to the Centre is foreign direct investment in infrastructure, especially with greater global readiness to provide finance for green technologies. Despite the huge investment deficit, cumulative FDI in infrastructure between 2000 and 2022 remains stuck at only around 5% of total inflows. The second lesson lies in the word ‘counter-cyclical’: the government has to spend more during an economic slowdown, whether the source of this deceleration is endogenous or exogenous. This provides the required resilience for future growth.

Rajrishi Singhal is a policy consultant and a senior journalist. His Twitter handle is @rajrishisinghal.

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