The unexpectedly high growth of the GDP deflator (8.4 percent) propelled nominal GDP growth of 17.6 percent.
The first advance estimates for GDP this year, 2021-22, were released on January 7. Growth is expected at 9.2 percent, lower than the Reserve Bank of India (RBI)’s 9.5 percent forecast.
Because these estimates, primarily for budgetary purposes, represent just three quarters of economic activity, the final count will likely be lower as the Omicron-led wave will drag down growth in the last or March quarter. Relative to the pre-pandemic year, 2019-20, the economy is measured to have grown 1.26 percent above the level in real terms, implying output lost due to the pandemic will be more than fully recouped this year.
Putting this in perspective, this represents a sub-1 percent average growth performance in two years, an average 2 percent growth in three years, and a five-year GDP trend average growth of 4 percent — ill-affordable by an employment-challenged country such as ours. It is a pointer to the monumental task of recovering lost ground that lies ahead.
Reverting to FY22 growth specifics, all demand segments contributed to the comeback from last year’s contraction (-7.3 percent). A standout performance of investment and exports reflects an even distribution between domestic and external demand components. The former, viz., private consumer, business and government spending together added 11.4 percentage points to overall GDP growth, with government expenditure contributing a full percentage point, which is more than three times in the pandemic year FY21 (0.3 ppts), and double the addition in FY20 (0.5 ppts). Net exports contributed -9.7 points on the back of strong foreign demand, with imports pacing 1.8 times over growth of exports (16.5 percent).
The pressure point is private consumption, whose 7 percent (year-on-year) bounce-back over -9.1 percent fall last year isn’t strong enough for restoration to pre-pandemic strength; at this pace, private consumer spending will still be 3 percent below 2019-20 levels.
The wellspring of its weakness, at least through the duration of the pandemic, can be seen on the production or supply-side GDP estimates: the Trade, Hotels, Transport, Communication & Broadcasting Services category, composed of many in-person services, is forecast to grow 12 percent after -18.2 percent decline last year, and leaving the segment almost 9 percent below its pre-pandemic size (FY20).
The other source is the mass-employment construction sector, where an 11 percent annual rebound is a puny 1.2 percent uplift above its pre-pandemic level.
These indicate the massive erosion in jobs and incomes generated by these sectors, which employ more than half of India’s low-skilled, low-educated, and low-income earners. These persons also constitute the bulk of the bottom-of-pyramid segment of demand with relatively stronger propensity to consume.
The unexpectedly high growth of the GDP deflator (8.4 percent) propelled nominal GDP growth of 17.6 percent. In part a fallout of the pandemic, this is not all negative. For example, it lowers public debt, and makes more room in the fiscal deficit, thus helping the government balance sheet (based upon 14.4 percent nominal GDP growth last February).
It also bolsters tax revenues; net product taxes, which rose 19 percent upon -3 percent decline last year, rebounded 15.4 percent above the pre-pandemic level or FY20 when these grew 9.5 percent; not all of the rebound in product tax revenues represents inflation but raised tax rates as well as extraordinary growth in imports. However, both rapid price growth or costlier goods and services, and higher taxation eat into consumers’ purchasing power. Therefore, the inflationary fallout coupled with increased taxation are a drag on consumption.
In balance, although the data portray a robust rebound, there are pockets of fragility that have a significant bearing upon sustenance of this recovery, and lifting growth further from the 9.2 percent forecast. Elevated inflation, and depressed consumer spending are concerning features at a point when macroeconomic policies can only retreat towards normalcy: Fiscal policy will be consolidative while monetary policy will be more attentive to inflation.
Equally, the test of the strength and endurance of this recovery will be known more accurately only after the pent-up demand wears off. It is well understood that pandemic fears and closures restrained demand, distorted it towards goods rather than services, and some products more than others; disentangling the one-off impacts from enduring ones is not easy, making it harder to assess the true strength of consumer demand.
Then, the contact-intensive services are being battered the third time around in less than two years’ time, currently by the Omicron variant. If inflation starts weighing down upon consumption, observed already in consumers’ future and discretionary spending intentions, the recovery strength could waver. Weak consumption has serious implications overall, notably for business investment, which must see strong and durable demand on the horizon to take on any risk whatsoever. For this, we need to wait for more data.Renu Kohli is a New Delhi-based macroeconomist. Views are personal and do not represent the stand of this publication.