Opinion Latest GDP data: Only the pessimists are surprised

Contrary to market perception, GDP growth came in higher at 7.2 per cent in 2022-23. The largest revisions happened in the fourth quarter estimates, with growth pegged at 6.1 per cent, and value added at 6.5 per cent. Core gross value added, an indicator of private sector buoyancy, grew by 7.7 per cent in 2022-23, a tad higher than the pre-pandemic growth of 7.5 per cent registered over 28 quarters (from the first quarter of 2012-13 to the fourth quarter of 2018-19) ending in the fourth quarter of 2018-19. Clearly, there seems to be a revival of investment activity that is driving this optimism.

The highlight of this release was that agriculture has performed significantly better, registering a growth of 4 per cent for the entire year. Services have recovered well, growing at 9.5 per cent, thus propelling overall GDP growth. The sub-segment trade, hotels etc. was an obvious performer, considering that data on high frequency indicators such as passenger air traffic has been consistently improving.

Turning to secondary indicators of growth, credit growth of scheduled commercial banks remained strong at 15.5 per cent as on May 5. The sector-wise credit data for April indicates that credit is 2.8 times higher than in April last year. The credit-to-GDP gap has narrowed, reflecting improved credit demand in the economy in the face of rising capacity utilisation.

The construction sector has remained upbeat due to the sustained government push on infrastructure spending. The healthy order book position of the sector (around Rs 7 trillion for nine construction players) reflects the medium-term revenue visibility and improvement in rural employment. In 2022-23, basic chemicals, roadways and real estate accounted for 53 per cent of new investment announcements.

During the last financial year, manufacturing exhibited muted growth of 1.3 per cent. However, it has picked up pace in the fourth quarter, growing at 4.5 per cent. High input costs have eroded the value added in this sector, though the fourth quarter results of 3,774 companies show that corporate margins are improving.

On the expenditure side, the data shows a mixed picture. Total final consumption grew at 6.4 per cent in 2022-23, dragged down by rural consumption with inflation in the beginning of the year hurting consumption. Private consumption, the largest component, saw growth fall to 7.5 per cent in 2022-23, while government consumption registered a growth of 0.1 per cent.

Part of the explanation for lack of private demand is the lagged response of rural consumption to the opening up of the economy. High frequency indicators of rural demand, which are still lagging urban demand, are showing mixed trends. Sales of domestic two-wheeler and diesel consumption have been showing traction in recent months, while tractor and fertiliser sales have moderated. FMCG companies, in the listed space, reported 14 per cent growth in top line, while their bottom line grew by 28 per cent in the fourth quarter.

Against the backdrop of stellar agricultural growth, this lagging rural demand needs to be probed. Our sense is that allied activities in the agricultural sector are acting as a countercyclical buffer to farmers’ incomes. Prices at e-NAM markets of certain commodities are greater than the minimum support prices, indicating better price discovery and income prospects for farmers. Perhaps it is time to consider these data points in addition to rural wages.

Interestingly, per capita net financial saving may have increased to Rs 15,700 in 2022-23 from the pre-pandemic level of Rs 11,590. Higher income growth — per capita GDP at constant prices expanded by 7 per cent for the three-year period ending in 2022-23 as against 5.3 per cent over the nine-year period ending in 2019-20 — and the free foodgrain scheme are clearly acting as enablers.

On the monetary side, inflation is likely to moderate significantly in the ongoing year, and a sub 5 per cent reading will now be the norm till at least October. The correction in core inflation will ensure that non-food, non-energy items feeding into manufacturing through input prices become less of a concern. The wedge between the correction in CPI and WPI inflation will determine pricing power over the year.

The broad picture that emerges from the data is that the overall strength of the Indian economy remains intact. The rebalancing of demand from private consumption to investments will spur growth once consumption picks up. Private investment activity looks robust and domestic monetary conditions remain supportive of growth in 2023-24. This makes us believe that growth is likely to overshoot RBI’s estimate of 6.5 per cent. As per our estimate, the economy is likely to grow at 6.7 per cent.

There are also some additional factors that could emerge as game changers in the coming days. The number of GST registrations is about 1.4 crore, whereas the current MSME units registered under Udyam have reached 1.87 crore. The gap between the two indicates the extent of further formalisation. As these enterprises are brought into the formal system, this could lead to a credit boom for these smaller firms.

While challenges and questions indeed remain on our glide path (and rightly so), half-baked research must not be allowed to influence the narrative around India’s growth story.

The writer is Group Chief Economic Advisor, State Bank of India. Views are personal