GDP | Economy in slowdown mode. Monsoon rains critical to quick revival

A woman walks through a flooded street during heavy rains in Mumbai. (Representative image: AP/ Rafiq Maqbool)

The Indian economy expanded 8.7 percent in 2021-22, from a contraction of 6.6 percent last year, but the annual headline growth numbers could be masking symptoms of a deeper slowdown that the broader economy may have slipped into.

A few pieces of statistics stand out from the provisional estimates of annual national income 2021-22 put out by the National Statistical Office (NSO) on May 31.

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India’s real (inflation-adjusted) gross domestic product (GDP) grew 4.1 percent in the fourth quarter (January to March) 2021-22 compared to 2.5 percent in the same period last year.

A proximate reason for this relatively slower pace of growth could be the spread of the Omicron-wave of the COVID-19 pandemic that locked down large parts of the economy during January and February.

On a sequential basis, India’s quarterly GDP growth actually does not make for a particularly happy picture. From a high of 20.1 percent in the first quarter (April-June 2021), aided by a low base in the previous year, the rapidity of growth has actually fallen ever since in the subsequent quarters making for a consistent descending line growing at 8.4, 5.4, and 4.1 percent respectively.

There are worry lines that are protruding out from many sectors. The biggest problem seems to be manufacturing, where gross value added (GVA) has contracted 0.2 percent during January to March.

The GVA, which is the GDP minus taxes, is considered to be a more realistic proxy to measure expansion of economic activity.

Expansion in the construction sector has also appeared to have slowed down considerably, crawling at 2 percent in the quarter. The Omicron wave-induced lockdown may have brought construction activity to a screeching halt, the results of which seem to be showing up in the national income numbers.

Road and other infrastructure projects can spur economic activity, boost construction, and create jobs. The segment accounts for about 10 percent of the GDP, and is the largest creator of direct and indirect employment, employing about 50 million people.

It has a strong multiplier effect, creating an estimated 2.7 new jobs indirectly for every Rs 1 lakh invested, with major forward linkages to sectors such as real estate, infrastructure and manufacturing, and backward linkages to steel and cement among others.

Private final consumption expenditure (PFCE), a metric to gauge household spending, too appears to have slowed down sharply. In the fourth quarter (January-March), at current prices, it grew just 1.8 percent, implying that families may have held back on planned or aspirational purchases.

The sharp rise in inflation levels, besides subdued household expectations about income growth, could be driving lower consumer confidence, and hammering down sales of products and services.

This slowdown comes at a time when people are battling with persistently high cost of living with growing prices of both essentials and aspirationals. A mix of high input costs, falling supplies, and costly imports walloped by a weakening falling rupee has made getting by get harder.

It’s not just soaring food or fuel prices that are hurting people’s pockets. Inflation is far deeper embedded than what the official price lines suggest. Soaring costs of several everyday services and non-essential products are bleeding household budgets.

Inflation expectations — or the view among consumers and businesses of where prices are heading — are above 10 percent, which implies that households expect the cost of living to get even higher.

A lot will depend on the monsoon rains, and its spatial distribution. It has already hit Kerala, the first port of call in India’s mainland, three days in advance, raising hopes of plentiful rains, which are critical to keep food prices down, and raise rural incomes.

For good farm output, the rains need to be not just plentiful overall, but evenly spread. The government will keep one eye firmly on which way the moisture-laden winds are blowing this year. The monsoon is critical to replenish 81 reservoirs necessary for power generation, irrigation, and drinking.

Besides, about half of India's farm output comes from summer sown kharif crops such as rice, sugar, cotton, and coarse cereals. Abundant rains can push up rural spending on several items such as televisions, cars, and gold, and help engineer a faster economic rebound.