- GS-3: Indian Economy and its challenges
- GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation
Global Uncertainties, India’s Growth Prospects
Context: On February 28, 2022, the National Statistical Office (NSO) released India’s GDP data for Q3 of 2021-22 along with Second Advance Estimates (SAE) for 2021-22.
What has been the growth performance of Indian economy?
- In the COVID-19 year of 2020-21, both real GDP and GVA contracted by minus 6.6% and minus 4.8%, respectively.
- The NSO’s SAE show that real GDP and GVA growth are estimated to recover to 8.9% and 8.3%, respectively, in 2021-22.
- Despite this improvement, the magnitude of real GDP at ₹147.7 lakh crore in 2021-22 is only marginally higher than the corresponding level of ₹145.2 lakh crore in 2019-20.
- Revival of demand has been slow
- The growth of consumption demand measured by private final consumption expenditure (PFCE) in 2021-22 over 2019-20 is only 1.2%
- The growth of investment demand measured by gross fixed capital formation (GFCF) in 2021-22 over 2019-20 is only 2.6%
- Growth in the construction sector in 2021-22 was at only 1.9% over 2019-20.
- Assuming some base effects to continue in the first two quarters, the annual growth in 2022-23 may not be more than 7%.
What are the challenges for Indian Economy in coming days?
- Rise in crude oil prices due to geopolitical conflict in Ukraine. It is estimated that an increase of U.S.$10/ barrel there is reduction in real GDP growth by 0.27% and an increase in CPI inflation by 0.40%. As a result the growth estimates will be brought down to 6.3% for 2022-23 (with CPI inflation of 6%)
- Alongside, there would be increase in government expenditures related to petroleum and fertilizer subsidies as rising prices will put pressure on government to offer reliefs in forms of reduced tax or increased subsidy.
- Other economic challenges emanating from global uncertainties may include a worsening of the current account balance due to higher import bills with a depreciating rupee.
- A study by the RBI in 2019 had estimated an increase in the current account deficit (CAD) following a U.S.$10/bbl. increase in global crude price, to be nearly 0.4% points of GDP. As a result, the estimate of CAD at 1.9% of GDP for 2022-23 may have to be revised upwards to 2.9%.
- Sectors that draw heavily on petroleum products, such as fertilizers, iron and steel foundries, transportation, construction and coal, would be adversely affected.
- Due to the discontinuation of transactions through SWIFT, there would be some disruption in trade to and from Russia and Ukraine.
- There would also be some adverse effects with regard to financial flows. Net foreign portfolio investment (FPI) outflows during October to December 2021 increased to U.S.$6.3 billion.
- Net foreign direct investment (FDI) inflows have also been falling during this period although they have remained positive.
- As developed countries are being forced to raise their interest rates (to contain their own inflationary pressures) there is increased outflow of U.S. dollars thus putting pressures on RBI to raise its policy rate.
- Policymakers may have to exercise a critical choice regarding who bears the burden of higher prices of petroleum products in India among
- Consumers (increased cost of fuel & inflation)
- industrial users (increased input cost)
- oil marketing companies (reduced profits)
- Government (reduced revenues & increased subsidy burden)
- If growth is to be revived, maximum attention should be paid to supporting consumption growth and reducing the cost of industrial inputs with a view to improving capacity utilisation.
Connecting the dots: