Skilled labour, buoyant services growth points
The Indian economy grew by 7.8% in the April-June quarter of the current fiscal. It is the highest growth rate in the past year and will likely be the peak growth performance in FY24. The rest of the fiscal will probably see moderate growth led by softening consumption and rising inflation. At 7.8%, India continues to be the brightest bulb in the box, as major economies, including China, the US and Germany, are either witnessing a slowdown or growth contraction. Given the external headwinds from slowing global growth and the lagged impact of interest rate hikes, analysts aren’t ruling out a downward revision of FY24 estimates of 6–6.5%. If it happens, it’ll further upset India’s ambitions to emerge as the world’s third-largest economy.
While the headline Q1 growth print was in line with expectations, the sub-components of growth confirm that the recovery in economic activity is not yet broad-based. For one, the manufacturing sector needs to pack more wallop. Notwithstanding the decline in commodity prices, the gross value added of the sector barely grew. Although the services sector did well in increasing its percentage share of GDP from 62 last year to 66 now, the share of private consumption declined moderately. The economy needs sustained buoyancy in the services sector, but high inflation and interest rates could spoil the momentum. Above all, the flat growth in government expenditure, even as private investment was yet to see a complete turnaround, led to a 7.8% growth print, lower than the RBI’s projected 8%.
Agreed that the government did the heavy lifting until now, and given the healthy balance sheets of corporates and banks, it might want to take a backseat. But until the private sector capex cycle kicks off, the Centre’s capital expenditure must continue creating jobs and absorbing the large labour force. India’s labour force participation rate has been declining steadily over the last 15 years, and one of the biggest challenges is to bring it up to speed and use the demographic advantage to improve productivity. To do so, we must create opportunities by setting up manufacturing capacities, growing the services sector, and upskilling the labour force. The growth upside will have to come through higher productivity, and the government must ensure that we achieve greater output for each unit of labour and capital, not just the headline growth number.