After fighting for breath in the intensive care unit last fiscal, the Indian economy is stirring to life during the current fiscal.
The first advance estimates of the national income, released Friday, show the country's GDP growing at 9.2% in FY22 as against a contraction on 7.3% in FY21.
Real GDP or GDP at constant prices in FY22 is expected at Rs 147.54 lakh crore, as against the provisional estimate of GDP for FY21 at Rs 135.13 lakh crore. Nominal GDP, considered as an approximate indicator of aggregate demand, is estimated at Rs 232.15 lakh crore in FY22 translating to an enviable 17.6% growth over FY21.
FY22's estimated national output may whistle past the graveyard, regaining and even surpassing the pre-pandemic level of Rs 145 lakh crore seen in FY20. While the services sector is putting on a fight, it's on the borderline of FY20 level, but with both agriculture and industry likely breaching the pre-pandemic perimeter, GDP growth appears to be decidedly moving north of 7-8% in FY23.
If the Covid-19 third wave that seems upon us, however, is mismanaged like the second wave, it could leave us with a bullet caught in the chest yet again.
Precisely to stave off any setbacks, strong domestic demand is essential to maintain growth at a rate that keeps inflation and employment at desired levels. Crucially, two of three key components of domestic demand namely household consumption, and investment, which suffered a deathly blow from the twin evils of economic slowdown and Covid-19 pandemic, are yet to turn the corner.
In FY22, private consumption is estimated at Rs 80 lakh crore, well below the Rs 83 lakh crore seen in FY20. Household or private consumption is the single most important variable accounting for over 60% of GDP. This covers all purchases made by consumers such as food, clothing, housing rents, and durable goods. But it's being battered by stagnant or falling incomes, rising unemployment, and sticky inflation.
The third component, general government expenditure has been giving it all in the past two years, while net exports constituting external demand too are turning in their best performance. In FY22, their output is pegged at Rs 17 lakh crore and Rs 31 lakh crore respectively, up from Rs 15 lakh crore and Rs 28 lakh crore.
From hereon, fiscal and monetary policy instruments must be effectively used to influence domestic demand. For instance, raising interest rates reduces investments first because the reduction in household spending reduces firms' incentive to invest in new plant and machinery. Two, it also increases borrowing costs. On the other hand, low rates stimulate household spending and accordingly corporate investment. But with persistent inflation, all eyes are on the RBI for its next course of action.
Likewise, fiscal policy operates by increasing or reducing revenue and expenditure (stimulus and austerity). Cutting taxes has an immediate impact on household income and indirectly on spending and with better-than-expected tax collections, expectations of tax cuts including on fuel are high.
As for sectoral trends, all the eight broad metrics will likely emerge unscathed this fiscal unlike the previous fiscal when six out of the eight components contracted. Among all, industry comprising mining and quarrying, manufacturing and electricity and utility services will likely see double-digit growth. Services too are expected to follow suit, but seen in absolute volumes, the sector is yet to catch up with FY20. Within services, financial services may grow at the slowest pace, while construction, trade and hotels will likely rake in the dough. In line with tradition, agriculture is estimated to grow by 3.9% this fiscal.