Growth numbers point to unevenness in economic recovery
India’s economic growth in FY22 has been a game of two halves. While growth during the first and last quarter was affected by Covid-19 infections and the related lockdowns, the better-than-expected performance in the remaining two quarters helped us achieve the 8.7% mark. While it puts India among the fastest-growing nations, in reality, key sub-components of national output are still under stress. Investment, one of the important engines of growth, regained momentum, but consumption, the lifeblood of the economy, is yet to find its own territory. Likewise, despite improvement during the year, industrial growth lagged behind the services sector in Q4, while for the full year, industry grew faster than services, which further confirms the unevenness in the ongoing recovery.
On the supply side, sequential momentum was held up by agriculture and construction, while on the demand side, growth was supported by government consumption, investment and net exports. The good news is that all sectors are now above pre-Covid levels in real terms; that the current sequential momentum indicates an annualised growth of 6% is a bonus. Things should improve from here on, but for the near-term outlook, which remains clouded with uncertainties due to the ongoing geopolitical conflicts and consequent impact on commodity prices, especially crude oil, weakening global demand, limited scope for incremental government spending and tightening financial conditions. The growth trajectory could also lose steam if weak consumption persists amid the impact of cost-push inflation.
The government’s supply-side measures regarding exports and excise duty cuts will likely temper the inflation trajectory, but they aren’t sufficient to offer any material reprieve and come at the cost of widening the fiscal deficit. Moreover, the peak impact of interest rate hikes on GDP will be felt only towards the end of the fiscal year. Lastly, business margins are likely to be compressed, amid an incomplete pass-through of input price pressures, while higher inflation would constrain demand growth. It means that chances of growing beyond 7% this fiscal are well within our reach, but given multiple uncertainties, that target is pretty much written in sand.