By Anjan Roy
India’s latest GDP figures could not have come at a better time for the ruling party BJP.. As the final phase of parliamentary voting draws to an end, the GDP figures for 2023-24 at 8.2 per cent show a hefty growth rate of the Indian economy. If the BJP led NDA wins in the polls, which is the most probable event, the financial market could be predicted to soar high.
But what is the secret behind such rosy picture when the rest of the world is not doing too fine. China for one is sliding and beset with prospects of serious financial melt-down. America is of course unabashedly healthy and defying all prediction of a recession despite rounds of interest rate hike. However, the policy interest rates in the US remain very high.
To get an insight into the growth triggers for the Indian economy, it is important to look at the dynamics of changes in overall investments, the trends in final consumption demand, exports performance and the flow of funds from overseas.
Private final consumption is a major factor in the Indian economy, which amounts to around 60% of the GDP’s expenditure side. It is thus the trend in this segment which basically sets the pace of the economy. In fact, a few years back some of the leading economists had pointed out that India’s growth was overmuch dependent on the trends in private consumption and it was a unstable model, being described as a “single engine ride”.
There are subtle changes in the composition and triggers for the continuing strong performance of the economy. These trends show some happy dynamics which takes the economy out of a possible morass.
The current spate of growth is driven by investment. More particularly by public investment. Public investment, which is mainly government led investments in infrastructure building and in social capital, is driving the economy forward.
Public investment has grown close to 29% of GDP which is a healthy trend. This could be made possible by a number of factors including robust growth in collections of revenues and indeed the final revenue collections are in excess of budget estimates. The GST yields have persistently crossed Rs 1 lakh crore month after month. This has enabled the public finances in a comfortable sphere. The fiscal deficit remained at 5.6% despite step up in outlays.
The government finances have been further helped by a co-operating Reserve Bank. The central bank has transferred unprecedented high dividends to the central government. The central bank has transferred Rs2.11 lakh crore to the central government. Additionally, the large surplus earned by the public sector banks could also have pushed up the central government’s expenditure plans, yet remaining within prudent fiscal parameters.
Coming to the next trigger, the latest figures indicate that domestic consumption has continued to remain strong. Some of the high frequency figures indicate hectic pace of growth in certain segments like auto sales, housing loans, fuel consumption. These are mainly in the urban sector. In the rural segment the strength of demand remains somewhat depressed, despite forecast about normal monsoon this year.
Thirdly, the exports are picking up although rather slowly. Merchandise exports have come into positive territory from negative in the previous quarter. Imports are also rising indicating strong domestic demand. Services exports are of course buoyant, though some uncertainties have emerged with the emergence of newer AI products.
For the policy makers, namely RBI and the North Block, the situation is further comfortable because of the benign inflation situation. CPI inflation was at 4.8% in April 2024, lower than 4.9% in March 2024. It has trended downward since January 2024. The downward pressure emanates primarily from petroleum related commodity groups namely, fuel and light and transport and communication services.
Given the favourable overall background, the next government has its task cut out. The emphasis should be to maintain the tempo of the economy by utilising its buoyant resources for continuing with infrastructure building programmes. If these triggers are maintained, it will in due course spill over into larger private sector investments.
Private investments come when their capacity utilisation is up and showing a rising trend. The indications from the business confidence surveys and other indicators show that the sentiments for larger private investments are turning positive. One can expect some significant pick up in private sector investments.
Indeed, Indian private investments as well as some large major private sector companies are all set to enter India. Taking advantages of the incentive schemes of the central government, more investors are feeling upbeat about India. Significant new beginning is expected in sectors like computer chip making and in semiconductors industry.
Going is so far good, but it is important to take note of the observations of a technical nature. Some economists have pointed out that the GDP deflator, that is the way the statisticians try to eliminate the effects of rising inflation on the GDP figures to get a peek at the real GDP trends, has been rather lenient.
These economics feel that the GDP deflator used for calculating the final figures was too low for giving more weightage to the WPI inflation figures than the CPI numbers. The WPI trends have been very low and sometimes in the negative, while the CPI hovered around 5.4%. They question the use of WPI heavy delegator against the CPI led one. The former shows a far higher rate of growth than if CPI heavy deflator is used.
Nonetheless, leaving aside some of the technical issues, there is no doubt that the Indian economy is showing a bounce in its steps. The economy has shown remarkable resilience and recovered sharply in the post-COVID phase in a hostile global environment. Given these trends, one can safely predict the economy’s pace to remain robust and the financial markets could show the same rising streak. (IPA)
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