Curb your enthusiasm

Recent optimism around India’s growth performance was further validated with the January-March 2023 growth printing at 6.1 per cent — higher than the government’s advance release (residual) estimate of 5.1 per cent. The economy is projected to have grown by a healthy 7.2 per cent in 2022-23, bringing the last two years’ average growth at a stellar 8.1 per cent.But some context setting is warranted here. This seemingly high growth continues to be influenced by base effects due to the contraction in output seen during the pandemic years. For instance, Q1 growth in FY23 stood at 13.1 per cent, driven primarily by a low base from the previous year while sequential growth had, in fact, contracted in the quarter. Looking at a comparison with the pre-pandemic output levels provides us with a more tempered picture — GDP in real terms is just about 10 per cent above 2019-20 levels versus almost double the increase in output levels witnessed during the previous three years (2016-17 to 2019-20). The statistical caveat aside, there are some reasons to be optimistic. The second half of the last year has seen an increase in sequential growth despite global headwinds and drag from lower goods exports. The biggest contributor to growth remained the services sector which has seen a strong recovery. The reopening effect has led to an exponential rise in services’ demand as people flock back to restaurants, hotels, and malls. The latest GDP release shows that almost 70 per cent of GDP growth in 2022-23 was led by a rise in the service sector. Of this, 50 per cent has come from a rebound in “trade, hotels, transport, and communication” services, with financial, real estate, and professional services a close second. On the demand side of the growth equation, investments continued to drive growth while consumption showed some signs of a slowdown as the re-opening effect probably has begun to fade. The detail of the GDP data also throws up some inconsistencies, curbing one’s enthusiasm from the fear of future data revisions. For one, agriculture growth came in at 5.5 per cent for Q4 — a 11 quarter high, despite the impact of heatwaves during the rabi season. Whether this is suggestive of a disproportionately high growth in agriculture allied activities remains an open question. Moreover, agriculture performance does not entirely tie up with the rather timid recovery in rural demand visible in a number of high frequency indicators. The trend in private consumption and certain services components is even more puzzling. Consumption growth in Q4 was 2.8 per cent with its share in GDP falling to 55 per cent — down by almost 6 percentage points from the previous quarter. On the contrary, supply side data shows services like trade, hotels, transport, and communication — which would primarily be driven by consumer demand — rising by 9 per cent. There is no doubt that India’s growth does seem impressive when compared to the rest of the world with major economies struggling to avoid a recession. However, recognising the magnitude of risks over the coming year should not be drowned under current exuberance.Consumption growth that drove output for most part of last year is beginning to flatten out. Tight monetary conditions, elevated price levels especially for services, and the risk of an uneven monsoon could exacerbate the unevenness of the consumption recovery even further. Moreover, with signs of slowing hiring intentions in certain sectors (like IT), income, and consumption growth in the urban middle-income bracket could start to wear off. For producers, despite the recent relief from lower input costs, the manufacturing sector could face headwinds from lower goods demand both in the domestic and global markets.Bottom line is that while the latest GDP growth prints might get one excited, the road ahead could be bumpy and a close watch on emerging risks is only prudent. The author is principal economist, HDFC Bank

Curb your enthusiasm

The detail of the GDP data also throws up some inconsistencies, curbing one's enthusiasm from the fear of future data revisions

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Curb your enthusiasm

The detail of the GDP data also throws up some inconsistencies, curbing one's enthusiasm from the fear of future data revisions

Listen to This Article

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