Editorial: Slow recovery

Higher interest rates and lack of pick-up in consumption against the backdrop of a slowing global economy will pose challenges in H2.

Hyderabad: As India makes a tryst with digital finance with the launch of the retail digital rupee on December 1, the trends emerging from the country’s economic performance reflect a mixed bag. The economy grew at 6.3% in the July-September quarter, down from 13.5% in the previous quarter. Manufacturing and mining sectors have contracted 4.3% and 2.8% respectively while production growth rate in eight key sectors slowed down to a 20-month low of 0.1% in October due to output contraction in crude oil, natural gas, refinery products, and cement.

Soaring prices forced the Reserve Bank of India to hike borrowing costs to keep inflation in the 2-6% tolerance band. After raising its benchmark rate by 190 basis points this year, the central bank is expected to stay hawkish at the monetary policy review next week. However, with agriculture and services sectors posting a growth of over 4% for the third straight quarter, it can be argued that the economy continues to recover, post the adverse impact of the Covid-19 pandemic, though the GDP numbers are lower than expected.

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Higher interest rates and a lack of pick-up in consumption against the backdrop of a slowing global economy will pose challenges in the second half of the current financial year. Experts are predicting a slowdown in the third quarter due to global headwinds and slow export growth. The Centre’s fiscal deficit in end-October touched 45.6% of the full year Budget Estimate, against 36.3% in the previous-year period. In actual terms, the fiscal deficit — the difference between expenditure and revenue — was Rs 7,58,137 crore during the April-October period.

Among the eight key sectors, agriculture recorded a GVA (gross value added) growth of 4.6% in July-September as against 3.2% in the year-ago period. Trade, hotels and transport services recorded a GVA growth of 14.7%, while construction and financial services grew 6.6% and 7.2% respectively. Tighter financial conditions globally are stoking recession fears and hurting India’s external finances. The country’s merchandise exports, which surged almost 200% in April 2021, have now fizzled posting an almost 17% contraction in October. While pandemic-related restrictions are fading away, coming festive season demand and high government spending are expected to provide another silver lining for growth.

Slower GDP expansion notwithstanding, India continues to remain the fastest-growing major economy ahead of China, which registered a growth of 3.9% in July-September 2022. Two bright spots stand out: private final consumption expenditure – a measure of consumption of goods and services by individuals – grew 9.7 % year-on-year during July-September while gross fixed capital formation – a proxy for investment activity – grew 10.38%. Going forward, even as recovery in domestic economic activity is yet to become broad-based, protracted global drags, shrinking corporate profitability, and diminishing global growth prospects are expected to exert pressure.