Don’t ignore warning signals on growth

The first advance estimates of the Gross Domestic Product for this financial year, released by the National Statistical Office (NSO), created some surprise because they exceeded most expectations and projections. According to the estimates, the economy is expected to grow 7.3% in real terms, as against 7.2% last financial year. The Reserve Bank of India’s Monetary Policy Committee (MPC) had made a projection of 7% in its December meeting. The economy grew at 7.7% in the first half, and the estimate shows that there may be some deceleration in the second half. It is also possible that the projection may be revised, going forward, because it is based on the data for the first eight months of the year. This is because the last few months may see a slowdown from the previous period. Even if that happens the economy would have grown at a very good rate, compared to all other major economies. 

Disaggregated data might moderate some cheer over the better-than-expected growth. The agricultural sector, which had done well for many quarters, might see a major slowdown this year. While it grew 4% last year, it might see only a 1.8% growth this year. That will be the slowest growth for the sector in eight years, and less than half the 4% growth last year. It may be still less because of the estimated decline of the kharif output, caused by the vagaries of last year’s monsoon. The foodgrain production is expected to fall by 5% and sugar by 11%. Pulses and oilseeds will also be affected. Rabi prospects are also not very bright. This will badly affect rural demand, which has in the past been a driver of growth. The services sector is expected to see a steep fall from 14% growth to 6.3% this year.
This will have a major impact on employment and incomes of people. 

Another major concern is that private final consumption expenditure is expected to see only a 4.4% growth, which would be its lowest in 20 years, barring the Covid period. Private consumption has traditionally been an important contributor of growth but it has been subdued for many quarters. Investment has shown good growth at 10.3%, but this was mainly because of government spending. It is not sustainable and might slow down in the coming months. It actually showed a decline to 8.8% in October-November. It should also be noted that the nominal GDP will only grow at 8.9% this year, as against 10.5% last year. So, while optimism over the higher rate of growth is in order, there are reasons for being cautious, too.