India recovered strongly after the pandemic, with its gross domestic product (GDP) growing a solid 9.1% in fiscal 2022. And now, provisional estimate of growth last fiscal has come in at 7.2% (revised from 7%).
This fiscal, we are penciling in 6% growth because of global headwinds.
So while the optimism of still being the fastest-growing large economy is understandable, there is no escaping the slowing trend.
Merchandise exports and industrial activity have been seeing sluggishness because of the deceleration in the advanced economies. Merchandise exports declined nearly 13% on-year in April, continuing a shrinking spree that began six months back.
Weak exports directly hurt the export-oriented domestic manufacturing sector, especially many segments within the sector that generate employment opportunities.
A moderate slowdown in domestic demand due to high borrowing costs is expected to further dampen manufacturing sector growth.
However, high-frequency indicators are yet to reflect a decisive slowdown so far as there is more to the economy than what data reveals.
At first glance, India appears to have weathered the impact of the pandemic and geopolitical tensions well. The economy grew 9.1% in fiscal 2022 despite the pandemic impact and little direct fiscal support.
Then, the growth slide was less steep at 7.2% in fiscal 2023 amid additional challenges related to geopolitical tensions. Here, along with the economy’s resilience to global factors, domestic consumer behaviour has been a large influencer of growth patterns.
Between fiscal 2021 and 2023, exports and fixed investments rebounded quickly towards pre-pandemic levels compared with other sub-segments of GDP. The global demand pick-up supported exports, while higher government capital spending drove fixed investments.
Further, a closer look shows that private consumption, which remained a laggard until fiscal 2022, covered more ground in fiscal 2023. Here an interesting sub-trend emerges. Before the pandemic, consumption of both goods and services was witnessing a sustained increase. But the pandemic changed the trend. Both consumption of goods and services fell during the pandemic, but the latter witnessed a steeper fall and a delayed recovery.
In India, the pandemic, and the ensuing uncertainty, bottled up consumer spending. As the economy started opening up, consumers started buying more goods and fewer services given the latter’s contact-intensive nature.
Naturally, after moving closer to pre-pandemic levels, goods consumption is likely to have plateaued slightly after the recovery. Manufacturing sector growth therefore slowed from 11.1% in fiscal 2022 to 1.3% in fiscal 2023.
Meanwhile, services consumption continues to be strong. Despite escalating costs on account of higher fuel, commodity and other input prices, demand for travel, tourism, recreation, and entertainment was robust in fiscal 2023. Hence, services sector output grew 9.5% in fiscal 2023 with fourth quarter growth at 6.9%.
Source Name:Economic Times