A vendor waits for customers at his vegetable stall at a wholesale fruit and vegetable market in Mumbai, India, February 13, 2017. REUTERS/Shailesh Andrade - RTSYFJY
The government's final consumption expenditure and private final consumption expenditure have grown 7.6 percent and 6.9 percent in FY22, riding on the back of economic recovery.
India's GDP is expected to grow 9.2 percent in FY22, according to the first advance estimate released on January 7 by the Ministry of Statistics and Programme Implementation. While this is 30 basis points lower than the Reserve Bank of India's (RBI) forecast of 9.5 percent, it would still be the highest growth rate for India in at least 17 years, thanks to an extremely favourable base effect.
On the expenditure side, gross fixed capital formation – a proxy for investment – is estimated to rise by a whopping 15 percent from FY21, the most in at least 10 years. Again, because of a low base.
In FY21, gross fixed capital formation and private final consumption expenditure had contracted by 10.8 percent and 9.1 percent, respectively. Government final consumption expenditure had risen 2.9 percent.
Given the low base, it is perhaps more instructive to compare the advance estimates for FY22 with those of FY20, rather than FY21. The resultant picture is far more sombre.
Compared to FY20, the FY22 GDP growth rate is a mere 1.3 percent.
The government's attempts to boost the economy are reflected in its final consumption expenditure being 10.7 percent higher than in FY20. Its focus on capital expenditure has also helped push gross fixed capital formation 2.6 percent above FY20 levels.
The laggard is private final consumption expenditure, which remains 2.9 percent below its FY20 levels.
Considering private final consumption expenditure is the largest contributor to the GDP, its return to 6-7 percent growth rates without the assistance of a favourable base is crucial. But with the pandemic wreaking havoc with household incomes, it is not a surprise that private spending is where it is.
The share of private final consumption expenditure in the GDP is seen falling to 54.8 percent in FY22 from 56.0 percent in FY21 and 57.1 percent in FY20.
Worryingly, the government's first advance estimate may be overstating private final consumption expenditure for the current financial year. The surge in COVID-19 cases since late December 2021 and the re-imposition of certain restrictions on movement and economic activities in parts of the country will likely hurt consumption spending in the last quarter of FY22.
As it is, the first advance estimate suggests private final consumption expenditure will grow a mere 1.8 percent year-on-year in the second half of FY22.
On the whole, demand remains weak. This could provide reason for the RBI to keep financial conditions accommodative for longer - as it seemingly wants to - despite market participants being of the opinion that high inflation should be pushing the central bank closer and closer to normalising monetary policy. The RBI has so far resisted, arguing that repeated supply disruptions, and not demand, are behind the rapid increase in prices.
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