Editorial: Gloom persists

Though India’s economy grew 13.5% in the first quarter of this fiscal, the clouds of gloom still hover over the country as the looming headwinds — worsening global growth prospects, the impact of rising inflation on consumption, and the progressive hike in interest rates — could end up denting the growth momentum. The GDP growth […]

Though India’s economy grew 13.5% in the first quarter of this fiscal, the clouds of gloom still hover over the country as the looming headwinds — worsening global growth prospects, the impact of rising inflation on consumption, and the progressive hike in interest rates — could end up denting the growth momentum. The GDP growth in the April-June quarter was lower than the Reserve Bank of India estimate of around 16.2%. At this rate, the RBI’s annual GDP forecast of 7.2% may not be achieved and the growth rate could be below 7%. There is a continued deficit in employment opportunities, subdued wage growth, limited mobility and rising inequality. The data released by the National Statistical Office (NSO) showed that even though the revival of economic activity has pushed the GDP to touch Rs 36.85 lakh crore for the June quarter, it is only 3.8% higher than the economic output of the corresponding quarter in 2019-20. One of the key factors for the growth this quarter was a rebound in consumption in contact-intensive sectors. While private consumption went up 25.9%, government spending rose 1.3% during the quarter. Private investment increased 20.1% during April-June over the corresponding period last fiscal as the diminishing pandemic fears gave the economy greater momentum in the first quarter. Trade, hotels, transport and communications — the largest services category — posted a year-on-year growth rate of 25.7% but was down 15% compared with the pre-covid first quarter of FY20. In an otherwise gloomy scenario, two bright spots appear to be emerging: private consumption — a measure of consumption of goods and services by individuals — grew 25.9% year-on-year during April-June while gross fixed capital formation — a proxy for investment activity — grew 20.15%.

There is also an improvement in public finance with the Centre’s fiscal deficit touching 20.5% at the end of July 2022-23 against 21.3% a year ago. It is clear that the pace of growth is moderating due to global recession fears and rising borrowing costs. The RBI has raised the benchmark policy rate by 140 basis points in three revisions since May, and may do more to bring inflation under its 6% target ceiling. In the coming months, India’s economy would face headwinds primarily arising from a widening trade deficit as a result of decelerating exports due to global demand slowdown. Additionally, investments in the economy could get hindered due to tightening borrowing costs and elevated input costs. Though economic activity is picking up, the labour market, especially the informal segment, continues to be mired in distress. The heightened demand for work under MGNREGA indicates the continuing absence of more remunerative employment opportunities and points towards the persisting divergence between the formal and informal parts of the economy. Continuing slack in the informal labour market reflects subdued wage growth in this segment.

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