GDP Growth Peak: Time for Private Sector to Play Its Part

Why in News?

• According to the recent data of the National Statistical Office (NSO), India’s real Gross Domestic Product (GDP) growth rose to a four-quarter high of 7.8 per cent in April-June.
• However, economists say growth is likely to slow in the rest of the year due to deficient rainfall, high inflation, and global concerns.

GDP and GDP Growth Rate

• GDP is defined as the total market value of all final goods and services produced within a country in a given period.
• It includes private and public consumption, private and public investment, and exports less imports.
• GDP is the most used measure of economic activity and serves as a good indicator to track the economic health of a country.
• Economic growth (GDP growth) refers to the percent change in real GDP, which corrects the nominal GDP figure for inflation. 

Analysis of the Recently Released Data for Q1 GDP Growth Rate

• Growth Rate is On Expected Lines
  • The surge in GDP growth to 7.8 per cent in the first quarter is on expected lines.
  • Most high-frequency indicators, including the Purchasing Managers Index (PMI) for goods and services and credit growth data already pointed to fast growth.
• Weakness in Exports
  • The data suggests some weakness in exports, which contracted by 6.3 per cent during the period.
  • However, it did not affect the momentum of the growth rate much.
• Disappointing Manufacturing Sector: The manufacturing sector was a bit disappointing, given that PMI for manufacturing was in a strong expansion zone, and corporate profits for the quarter were healthy.
• Surge in Construction
  • Construction surged 7.9 per cent over a high base, and on the back of government capital expenditure (capex).
  • It indicates a pickup in real estate activity and lower input prices. That is likely to have prompted employment growth in construction which is a labour-intensive sector.
• Investment to GDP Ratio on a Healthy Point
  • On the demand side, the investment to GDP ratio was at a healthy 34.7 per cent (like last year).
  • The Centre’s aggressive budgeted spending target, along with a sharp rise in spending by states has helped.
  • Spending by the Centre grew at a massive 59 per cent, and for 16 major states, it rose 76 per cent. But unlike central government capex, the high state capex growth was over a very weak base.

Importance of the Private Sector to Maintain the Momentum of the Growth Rate

• The Government Cannot Invest Beyond a Point
  • Government cannot keep pumping up investments at the current rate beyond this fiscal as it needs to stick to its fiscal consolidation path.
  • Therefore, the private sector will have to play its role in order to uphold the growth.
• Favourable Conditions for Private Sector
  • The good part is, conditions for the private sector to play its part is becoming favourable.
  • Private companies have cleaned up their balance sheets and are ready to re-leverage and drive the investment cycle.
  • The government’s continued focus on infrastructure creation will keep improving connectivity and lower logistics costs, helping to crowd-in private investment.
• The Private Sector Can Accelerate the Manufacturing Sector
  • The Production-Linked Incentive (PLI) schemes could help fast-forward private investments in specific manufacturing sectors over the next few years.
  • The West’s desire to diversify global supply chains away from China presents good opportunities.
  • Sectors such as steel and cement, which are linked to infrastructure development, and some others such as petroleum products and aluminium are seeing a notable pick-up in investment activity.

Challenges That May Impact the Growth Rate in Upcoming Quarters

• Unclear Demand and Consumption Situation in Rural and Urban Areas
  • The private consumption grew at 6 per cent over a high base. Most of this comes from the urban economy, where services growth rose sharply.
    • Private Consumption is a measure of all the money spent by consumers in the country to buy goods and services. It is often called as consumer expenditure.
  • Nearly two-thirds of services are urban-centric. Additionally, private corporate sector salaries are expected to grow at around 10 per cent this fiscal, which will support urban consumption.
  • In contrast, the rural economy is seeing flat wages, weak demand under the MGNREGA (due to movement of labour to urban areas) and risks to agricultural output from weather vagaries.
• Private Consumption Demand Could Decline Due to Food Inflation
  • In the current July-September quarter, private consumption demand could weaken sequentially because high food inflationis bound to lower the spending power.
  • While inflation is likely to soften by the third quarter of this fiscal, it will entirely depend on responsive supply-side measures to bring down cereal prices, and the seasonal arrival of vegetables, which will lower prices over the next two months.
• Slowdown in West Can Impact Industrial Production
  • In the second half, other challenges would come into play, all of which could impact industrial production.
  • One is the slowdown in the West, particularly Europe. Though major advanced economies have remained resilient in the first half of this year, S&P Global expects a shallower but more protracted slowdown as interest rates stay elevated for longer.
  • Europe will see a sharper downturn with interest rate hikes, cost of living shocks and adverse geopolitical factors.
• Poor Merchandise Export Can Impact Manufacturing Sector Growth
  • For India, the poor showing on merchandise exports, which has contracted in each of the past six months, will also weigh on manufacturing sector growth.
  • While the decline in exports growth is price-led, volumes are also falling for some.
  • Data from the Ministry of Commerce and Industry shows export volume in 40 out of 74 commodities fell in April-June 2023.
  • India’s goods exports face stronger headwinds from the Asia-Pacific region than the West.
  • These could worsen as both Asia and the west are expected to decelerate in the second half of this fiscal.
  • So, despite the cushion from services exports, overall exports are on a decline this fiscal, which would weigh on domestic production sectors.
• Impact of Series of Rate Hikes by the RBI
  • The peak impact of the series of rate hikes by the RBI will play out from now. The repo rate has been raised 250 basis points since April 2022 to tame inflation.
  • The established thesis is that rate hikes first moderate growth before they impact inflation.
• El-Nino Impact
  • After a deficient June and above-normal July, rains have again slipped below long period average (LPA).
  • With El Niño conditions getting entrenched, rains in the rest of the season have become crucial to lift agricultural output and rural demand and subdue inflation.
  • Rains also influence groundwater and reservoir levels for the rabi crops, which are largely irrigated. 
  • However, the amplified risk to agricultural output and prices is visible in the government’s proactive and reactive measures to shore up supplies. For example, export bans/export tariffs, stocking limits, imports of pulses, etc.
• Impact on Tax Collections
  • Nominal GDP was only 20 basis points higher than the real growth because of deflation in wholesale prices and low consumer price inflation in the first quarter.
  • If sustained, slower nominal GDP growth can weaken tax collections.

Conclusion

• Growth in the July-September quarter will be moderated by softening consumption, as spiking inflation will impact the spending power.
• Therefore, the expected GDP growth to slow to 6 per cent in the current fiscal from 7.2 per cent the previous year due to various challenges.
• However, India will remain the fastest-growing G20 economy this year.

Q1) What is the difference between private and government consumption?

The private consumption includes consumer spending on goods and services. The government consumption consists of government spending on goods, services, and investment. The disposable income is calculated by subtracting total government tax revenue from national income.

Q2) How does RBI manage inflation by changing interest rates?

Interest rates and inflation are inversely proportional. Low interest rates lead to people borrowing more from banks and saving less. This increases the supply of money in the economy and also the demand. As a result, prices of commodities rise and cause inflation. In this scenario, the RBI tends to increase the interest rates to reduce the money supply. People, on the other hand, tend to borrow less and save more when interest rates are high. RBI tries to balance the money supply and interest rate to create a conducive environment for economic growth. 

Source: The Indian Express