In the last financial year (from April 2022 to March 2023), the Indian economy grew at the rate of 7.2 percent. Then the International Monetary Fund and the World Bank had estimated that the growth rate would come down to around seven percent in the financial year 2023-24. The Reserve Bank of India also agrees with this estimate, but it is a matter of great surprise that a huge growth has been recorded in the first half of this financial year. The growth rate during this period has been 7.7 percent, which is much higher than these estimates. The main reason for this has been an increase of 31 percent (nominal figure without adjusting for inflation) in capital expenditure by the government and private sector. This increase in capital expenditure (in which the government has contributed a large share) is much higher than the 11 percent increase in the last financial year. In such a situation, increase in gross domestic product (GDP) is natural. Now the government has published the advance estimate of the annual growth rate for this financial year, which is 7.3 percent. This means that the government is expecting some decline in the growth rate in the second half. The estimated rate for the second half is around 6.9 percent. Again this figure is very impressive and is higher than the estimates of the Reserve Bank. Is this estimate too optimistic? We will know about this soon. This estimate has been determined on the basis of data available with the government. These figures include data related to tax collection including Goods and Services Tax, transportation of goods, tourist arrivals, exports, oil and energy consumption etc.
But no one knows how soon this pace of growth will slow down. The best economists are not expert psychologists, because growth is ultimately driven by consumer and investor psychology and sentiment. The growth rate in consumption in the current financial year is only 4.4 percent, which is less than the GDP growth rate and much less than the increase in capital expenditure. Consumer expenditure accounts for more than 60 percent of GDP and has a major contribution in accelerating the growth rate. This growth depends on how the family income is increasing, what are the prospects of employment growth, how is the expansion of means of livelihood etc. So it is clear that according to the government’s own assessment, the period from October to March is a period of some decline in the economy. To some extent this is also because government funding for capital expenditure cannot continue indefinitely. This puts pressure on the fiscal deficit, which, if not kept under control, could push the debt-to-GDP ratio to 100 percent, the International Monetary Fund has warned. Therefore, when the government reduces its expenditure, then for the economy to grow, the performance of other factors should be better.
Whatever is happening in the rest of the world, it is natural to have an impact on the situation in India. Globally, there is a possibility of recession in the most developed economies. Due to geopolitical tensions, the dark clouds are getting darker, due to which investors are reluctant to take risks. There is no sign of an end to the Russia-Ukraine war that has been going on for two years. The fear of the Israeli-Palestinian conflict spreading to the Middle East is also increasing. Attacks by the Houthi group on commercial ships in the Red Sea have raised concerns. More than half of global trade traffic passes through this route, but many ships are no longer passing through it. Any tension, especially in the Middle East, can increase oil prices, which will be very harmful for India. In such a situation, there will be a negative impact on inflation, fiscal deficit, consumer and investor sentiment and ultimately growth. The general elections can also have an impact on the economy. When the election code of conduct is implemented, spending on development will stop. Apart from the Lok Sabha, assembly elections are also to be held in many states. There is some increase in capital inflows into the economy during election years. The government tries to complete pending projects, dispose of more files, recruit on vacant government posts, etc. All this may be financially questionable, but it is positive for the economy. The increase in expenditure before the elections means that there may be some reduction in it after the elections. If the present government feels that its return does not depend on artificially increasing expenditure, then it may not increase expenditure now.
The positive aspect of economic prospects is the strengthening of structural factors. This includes a young population and growing labor force, rapid urbanisation, increasing spending on green economy and big infrastructure aspirations. Also, there is a continuous growth in the export of software services. The negative aspects include weak consumer spending, global uncertainty, fear of rising oil prices, high inflation and weak prospects for employment growth. It is noteworthy that total consumer expenditure will increase when consumers of all income groups are in good condition i.e. prospects of income and employment are good. Therefore, it is a matter of concern that the condition of lower income groups is not good. This is a continuation of a growth story in which high-income consumers and those who purchase high-value goods and services are doing well, but people in lower income groups are struggling. The increase in real wages is at a low level. Especially in agriculture, rural areas and unorganized sector this increase is very less. This is a serious challenge for policy-making. In an attempt to compensate for the lack of growth in the income of the poor, the free ration scheme for more than eighty crore people has been extended for five years. To sustain rapid economic growth in the long term, it is necessary that this growth be broader and more inclusive. On a balanced basis, we can expect the growth rate to be lower in the next financial year 2024-25 than this year.
(These are the personal views of the author.)