India’s growth continues to surprise on the upside. The 7.6 per cent GDP growth as per the National Statistical Office’s second advance estimate has surpassed all previous estimates.
On January 5, the first advance estimates had pegged GDP growth at 7.3 per cent. Additional data for two months pushing up GDP growth implies a strengthening economic momentum in the third quarter — in addition to the gains from rising net taxes (taxes minus subsidies). In comparison, growth in gross value added without the net tax impact was lower at 6.9 per cent.
Considering that for this full fiscal year, growth is now seen at 7.6 per cent with the first three quarters growing at an average of 8.2 per cent, the implicit fourth-quarter growth turns out to be 5.9 per cent. Although real GDP is still below where it would have been without the pandemic, domestic strengths and policy focus have pulled the economy closer to the 7 per cent growth path. Strengthened bank and corporate balance sheets and the government’s focus on infrastructure have improved growth performance and potential. In its latest monetary policy statement, the RBI had projected India’s GDP growth at 7 per cent for next year.
We expect growth to moderate from these levels next year, with high interest rates and a lower fiscal impulse (from a reduction in the fiscal deficit to 5.1 per cent of GDP) tempering demand and net tax impact on GDP normalising in the coming year. Monetary policy has limited heft to propel the economy because inflation is projected to stay above the RBI’s 4 per cent target amid economic momentum. To be sure, the second advance estimates are not very relevant from the point of view of GDP growth estimates for this year. For that, the provisional estimates in May will provide a better estimate with a longer shelf life. What makes it an important release is the host of other data that comes along, including details of private consumption, savings and investment for 2022-23.
At 3 per cent growth, private consumption has trailed overall GDP growth. Rural consumption was likely slower than urban since high food inflation affects the former more and eats away discretionary spending power. This is more so when agriculture has grown a mere 0.7 per cent. Last year, nominal food consumption spending went up 13 per cent. A similar trend likely played out this year given food inflation remained high. In some sectors, higher-ticket items have done better than the entry-level ones.
Interestingly, household consumption expenditure data released last week shows shifts in consumption expenditure towards non-food items over time, which typically happens with rising per capita income. Even within food, there is a shift from cereals to processed items. This new information can help adjust weightages in the consumer price index basket which is currently based on 2011-12 consumption patterns. The second important data point is the split of national savings between the government, households and the private sector. The overall savings rate (savings/GDP) at around 30 per cent for 2022-23 remains below the decadal peak with corporate savings at 11.2 per cent of GDP.
The most interesting aspect is that household savings are 61 per cent of total savings. It was the largest component and its share in GDP fell to 18.4 per cent in 2022-23. Household savings are split between financial and physical savings. Financial savings data released by the RBI and reported by NSO in its release shows a sharp fall in net financial savings of households to 5.3 per cent of GDP in 2022-23 from 7.3 per cent in 2021-22.
Net financial savings are calculated as the difference between gross savings and household borrowings/liabilities. NSO data shows that while net financial savings as a percentage of GDP fell, physical savings rose. Apparently, households used borrowings to acquire physical assets such as houses which pushed up physical savings.
This is reflected in the strong housing demand. This trend is likely to have continued in this fiscal as well, since retail borrowings have increased sharply amid robust demand for assets. To boot, consumers, particularly the younger ones, have become debt-friendly. Over the years, savings in physical assets have always been higher than savings in financial assets. With the thrust on financial inclusion, the financial savings rate climbed and the gap between financial and physical savings narrowed.
Then came the pandemic, when there was a sharp jump in the financial savings rate while physical savings dropped. In 2020-21, net financial savings rose temporarily above physical savings. Some of this was corrected after the recovery from the pandemic started. Once again, household savings in physical assets have trumped net financial savings, which hit a decadal low in 2022-23.
The disaggregated investment is the third important data point released by the NSO. This is the first time we have comprehensive data on much-tracked private corporate investments, in addition to public and household investments for 2022-23.
As anticipated, public and household investments were the faster growing investment components in fiscal 2022-23. Private corporate investment did not show any definitive sign of revival as its share in total investments was stagnant. A somewhat similar situation is playing out in the current fiscal since government and household investments have been relatively strong.
That said, there are signs of a pick-up in corporate investments in the current fiscal. Investments driven by the Production-Linked Incentive (PLI) scheme, notably in pharmaceuticals and electronics, have complemented rising investments in steel and cement, which are directly linked to the government’s infrastructure and housing revival.
We expect higher capacity utilisation levels in the manufacturing sector to turn into higher capex. There will also be a transition from assembly-type operations towards core/capital-intensive segments such as advanced chemistry cell batteries and electrical vehicles under the PLI scheme. Healthy corporate balance sheets improve the ability of the corporate sector to leverage and undertake investments. A broad-based revival of private investments is critical to sustain high growth rates over the medium run as the government tempers its fast and furious investments to enable fiscal consolidation.
The private corporate sector is now primed for investments. An extra impetus can come via reduction in policy uncertainty and compliance cost. That would be a key ask from the next government.
The writer is chief economist, CRISIL
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02.03.2024
India’s growth continues to surprise on the upside. The 7.6 per cent GDP growth as per the National Statistical Office’s second advance estimate has surpassed all previous estimates.
On January 5, the first advance estimates had pegged GDP growth at 7.3 per cent. Additional data for two months pushing up GDP growth implies a strengthening economic momentum in the third quarter — in addition to the gains from rising net taxes (taxes minus subsidies). In comparison, growth in gross value added without the net tax impact was lower at 6.9 per cent.
Considering that for this full fiscal year, growth is now seen at 7.6 per cent with the first three quarters growing at an average of 8.2 per cent, the implicit fourth-quarter growth turns out to be 5.9 per cent. Although real GDP is still below where it would have been without the pandemic, domestic strengths and policy focus have pulled the economy closer to the 7 per cent growth path. Strengthened bank and corporate balance sheets and the government’s focus on infrastructure have improved growth performance and potential. In its latest monetary policy statement, the RBI had projected India’s GDP growth at 7 per cent for next year.
We expect growth to moderate from these levels next year, with high interest rates and a lower fiscal impulse (from a reduction in the fiscal deficit to 5.1 per cent of GDP) tempering demand and net tax impact on GDP normalising in the coming year. Monetary policy has limited heft to propel the economy because inflation is projected to stay above the RBI’s 4 per cent target amid economic momentum. To be sure, the second advance estimates are not very relevant from the point of view of GDP growth estimates for this year. For that, the provisional estimates in May will provide a better estimate........
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