The consensus growth estimate for 2023-24 hovers around 6.3-6.5 percent with the Reserve Bank of India (RBI) sticking with 6.5 percent and both the World Bank and the IMF projecting a 6.3 percent growth. The RBI’s numbers seem to be on the back of the 7.8 percent growth in Q1 2024 which it believes was due to personal consumption and fixed capital formation growing smartly. It also believes that there has been an uptick in capex spending, especially by the petroleum sector and railways, which it expects to offset the negative growth in exports. But it also acknowledges that the private sector has not been investing enough. It also hopes that the growth in services exports will compensate for the drop in manufacturing.
The World Bank, which revised down its 2023-24 GDP forecast to 6.3 percent from an earlier 6.6 percent, seems to be in line with the actual Q1 2024 growth rates. Thus, it expects that personal consumption will grow more slowly while government spending may actually decline. Private investment is also expected to grow more slowly. Surprisingly, it expects exports to grow at 9.2 percent, perhaps enthused by software services exports. A lower current account deficit of 2.1 percent (down from 3 percent) is therefore expected to boost GDP growth.
The IMF was the only one to revise growth estimates upwards, though very marginally, from 6.1 to 6.3 percent. It said that it was encouraged by the stronger-than-expected consumption during April-June 2023. It also expects current account deficit to fall to 1.8 percent. Many of the other risks it highlights are much the same as the others.
Among the common threads is the fact that personal consumption will be an important driver, along with exports, which are expected to fill the drop in manufacturing. The belief that improved high-frequency indicators such as automobile sales or flight ticket sales will result in stronger consumption growth, remains to be tested, given their low share in overall spending and also income inequalities. On external trade, the hopes on software exports may perhaps be justified based on past performance, but the muted forward guidance of the IT majors recently could make it a variable to be watched closely. On imports, the consensus seems to be that slower global growth would cap oil price increases and thereby limit the risk to oil-importing economies. This appears to be a reasonable assumption, but it is the unknowns (wars and supply shocks) that could spoil the party.
Low Share of Manufacturing
The growth dynamics during the current year have not changed much. Incremental growth during Q1 2024 (from the output side) came mainly from services (about 67 percent) while manufacturing contributed just 10 percent. This has been a long-term trend for some years now. The contribution of net taxes to GDP (11 percent last year) is becoming increasingly hard to ignore, given both the buoyancy in taxes and the reduction in subsidies. On the expenditure side, the analysis has been more controversial, due to the massive increase in ‘discrepancies’ in Q1 2024. These actually represent the unreconciled differences between the output and expenditure methods and have usually tended to level out over time. The fact that output (GVA) actually grew by 7.8 percent during the quarter should also put these fears to rest. But the real concerns are about the slowing personal consumption and the massive rise in the net trade deficit (almost 200 percent) during Q1. A 7.8 percent growth despite these factors thus looks commendable and perhaps also open to question, as the recent controversy showed.
Not surprisingly, the hopes on private investment (and manufacturing) seem to be waning a bit, given the continued reluctance of private investment. The heavy lifting done by the government through the public sector is mainly in railways, petrochemicals and roads. But otherwise, a large part of fixed capital formation has come from households through increased residential home construction.
What has been missing in the search for growth is an analysis of the impact on jobs and incomes. Greater investment in manufacturing, for instance, does not imply an automatic increase in growth and jobs. This is due to the high externalisation ratio of the sectors under manufacturing, where value-addition, on average, is only about 22 percent of output. Thus, while manufacturing contributes 35 percent of the economy’s output, it adds only 16 percent to the GDP. Petroleum coke and chemicals, the top sector within manufacturing, contributes 10 percent of the economy’s output but add only 5 percent to GDP.
Similarly, the manufacture of equipment and machinery (which includes automobiles) contributes only about 3 percent to GDP, but 7 percent to total output. This is the nature of manufacturing rather than a defect. This is perhaps why, in creating growth and jobs, the manufacturing sector has been a distant third, behind services and agriculture. Policymakers have been wanting to raise the share of manufacturing from 16 percent to about 30 percent over five years. Given the current levels of value addition, this would imply an increase in output by almost 90 percent, which works out to a 14 percent annual growth. Leave alone the enormity of the investment required, the fact that manufacturing output rarely crossed double-digit growth in the past shows the enormity of the task.
S A Raghu is a columnist who writes on economics, banking and finance. Views are personal and do not represent the stand of this publication.
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