7 min readDec 31, 2022 11:56 AM IST
First published on: Dec 31, 2022 at 08:09 AM IST
Restrictions imposed on activities were fully eased only around March this year. But, they had mostly been lifted by September 2021. We can now attempt to answer the two main questions about India’s economy with better accuracy: How far is current output from the pre-pandemic path, and what will be the growth going forward? For nearly three years, growth percentages were being distorted by pandemic-driven disruptions.
On the pre-pandemic path, the economy would have continued growing at 6.7 per cent annually, as it did on average in the decade preceding the pandemic. Output, as seen in the official GDP statistics, seems to be stabilising about 10 to 11 per cent below this path, as seen in the September quarter of 2021 as well as the June and September quarters of 2022. This also suggests that year-on-year numbers can now indicate the trend of growth going forward.
The consensus among economists (and the RBI) currently is that growth will be below pre-pandemic levels, with output drifting away from the pre-pandemic path: Think of two lines slowly diverging. While turbulence in the global economy is a valid concern, the anaemic growth forecasts are also affected by the weak GDP levels reported in recent quarters, which imply significant economic scarring due to the pandemic.
For forecasters, the trend is a friend. Individuals, households, and often entire populations, have predictable habits. While all inputs affecting economic output are not as consistent, the reason different forecasts for the output of 1.4 billion people vary by only a few decimal points is that economic growth has a certain momentum. If trend growth is 6.5 per cent, the economists who fear a slowdown may forecast 6.2 per cent, and those that expect an acceleration would peg growth at 6.8 per cent. But when this trend breaks, like it has since 2020, both the output level and its trend growth get unanchored. Paucity of data and heightened uncertainty force forecasters to listen to other forecasters (there is safety in being with the crowd), resulting in estimates coalescing around relatively randomly chosen numbers. In the process, incongruities emerge. For example, while consensus forecasts 4.5 per cent GDP growth in the second half of this fiscal year, they then project a return to 6 per cent growth next year.
As new data comes in, though, forecasts will get recalibrated. What if estimates of current GDP were flawed, and the gap versus the pre-pandemic path was 8 and not 11 per cent? Would that not mean current growth is meaningfully higher, and therefore, despite the slowdown due to global headwinds and higher interest rates, growth next year may still be above pre-pandemic averages?
Compared to 2019, annualised growth in GDP (CAGR) in the September quarter this year was 2 per cent. However, a wide range of volume indicators, like car sales, e-way bills (for GST), freight (both road and rail) and cement demand show much stronger growth. A limitation of these indicators is that they do not track the sizeable informal sector and are biased towards the consumption of upper-income households. However, while growth in sales of fast-moving consumer goods (FMCG), which are more broadly consumed, is indeed slower than for discretionary items, even this is comparable to reported GDP growth.
We can also use energy consumption as a proxy, as GDP growth cannot be achieved without a rise in energy use. Nearly all forms of dense energy (like coal, oil, gas and solar) are formal, and monthly data is available. An index of energy use shows 7 per cent annualised growth in the September quarter, compared to the same period in 2019. Even after adjusting for coal shortages in 2019 and the mix shifts in the economy, this method too suggests the 2 per cent CAGR reported in GDP may be too low. Energy demand generally grows slower than GDP.
Further, economic normalisation occurs a few quarters after lifting of activity restrictions, and there are signs of a pick-up in demand for low-wage jobs. Restrictions mostly curtail consumption of contact services, which mostly means forgone consumption for upper-income households and lost income for lower-income households. As is now visible in the strong momentum in travel and tourism or footfalls in malls, this is now rising above pre-Covid levels, implying more hiring.
Another drag on growth has been weak government spending, the constraint being the ability to spend instead of fiscal space, as visible in the burgeoning government cash balances with the RBI. These balances have now fallen despite continuing strength in tax collections, implying that state governments are now starting to spend. This too should support a revival in low-wage jobs.
Thus, even the shortfall in low-income consumption should get bridged going forward.
Growth is likely to slow from current levels. Not just due to the tapering of pent-up demand and the lagged impact of higher rates, but also because of turbulence in the global economy. The concerns about India’s balance-of-payments are intact, though the reasons have shifted. Whereas earlier in the year the stress came from high energy costs, the pressure is now from slowing exports and potential capital outflows. BoP pressures are hard to offset quickly and given the elevated risk of accidents in global financial markets in the coming quarters, to which India, given its dependence on foreign capital flows is particularly vulnerable, a mild though deliberate slowing down of the economy may be necessary.
The conclusion is that while consensus may be expecting growth to slow from 7 to 5.5 per cent, it is likely that growth may be slowing from well above 8 per cent to around 7 per cent in the next fiscal year. Whether the statistics office can accurately capture this growth is less important. That it is below the growth we need to sustain to ensure India does not grow old before it gets wealthy will remain a policy challenge. However, near-term, it is also likely that the taxes the government collects, sales companies see, and the earnings stock markets invest on, can be higher than currently forecasted.
The writer is co-head of APAC Strategy for Credit Suisse
On the pre-pandemic path, the economy would have continued growing at 6.7 per cent annually, as it did on average in the decade preceding the pandemic. 
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