Economic growth may not hold if private spend dips, say economists

Economists say revival will hinge on govt spending, policy support

Robust economic growth in the first quarter may be difficult to sustain going forward with private investment likely to taper off and demand recovery expected to take longer, economists have cautioned. With the low base effect set to wear off in the coming quarters, economic revival will depend largely on government spending and monetary policy support as Covid-19 related risks persist.

India’s GDP grew by 20.1 per cent in the April-June quarter of 2021-22 year-on-year, but was 9.2 per cent lower than the level attained in the first quarter of 2019-20.

While gross fixed capital formation, indicating private investment, grew by 55.3 per cent in the first quarter, economists suggested that the growth is unlikely to hold. Gross fixed capital formation (GFCF) is in fact, 17 per cent lower compared to the 2019-20 levels in the corresponding quarter. Private final consumption expenditure, a proxy for demand, grew by 19.3 per cent in Q1, but is nearly 12 per cent lower than the levels in Q1 of 2019-20.

“The coming quarters may not be as robust as believed. The recovery that we have seen is not because of the government spending but due to the private sector. I fear that private investment may taper off in the coming months. Consumption also seems to have weakened,” said Pronab Sen, former chief statistician of India. “If that trend continues…and private final expenditure stagnates or goes down a little bit and the government doesn’t increase its expenditure, then I am worried about the coming quarters,” said Sen, who’s currently the country head of International Growth Centre (IGC).

M Govinda Rao, chief economic advisor, Brickwork Ratings, concurred with the outlook on private investment cycle and said that the revival was quite some time away and was unlikely before FY23. He added that RBI’s estimate of a 9.5 per cent GDP growth for FY22 could hold and may even exceed.

Sunil Kumar Sinha, Principal Economist, India Ratings & Research, said that as things stand now, “…economic recovery will continue to need both fiscal and monetary policy support in the near term to ensure that recovery does not falter on the way to full recovery.”

The Reserve Bank of India’s Monetary Policy Committee has kept the repo rate unchanged at 4 per cent for the seventh straight time in August. RBI governor Shaktikanta Das has indicated an accommodative policy stance to support growth amid the possibility of a third Covid wave.

Rumki Majumdar, economist at Deloitte India, said that consumption--the biggest driver of growth--may take a while to take off amid the pandemic uncertainties. “With risks looming over pent-up demand, we expect economic activity to pick up rapidly in the second half. The pace of the recovery may get pushed by a couple of quarters and flow into the next fiscal year and growth may be robust at above 8 per cent, provided we can keep the infection numbers under control,” said Majumdar.

“Going forward, it will be critical to watch the pick-up in consumption GDP as the consumer sentiments revive,” said Rajani Sinha, Chief Economist and National Director - Research, Knight Frank India. The pick-up in pace of vaccination and movement towards normalcy will aid revival in consumer and business sentiments, added Sinha.

Rao of Brickwork Ratings said the muted growth in public administration. defence and other services, suggested that the government had been far too cautious in increasing its expenditure to contain the fiscal deficit. Public administration. defence and other services posted a 5.8 per cent growth over FY21, but a 5 per cent contraction over FY20.

Sreejith Balasubramanian, economist (fund management) at IDFC AMC, suggested that support from rural, particularly agriculture, needs to be monitored given the fluctuations in monsoon rainfall and its impact on reservoir levels and crop harvest. “In the medium term, export momentum could soften and a K-shaped recovery could be insufficient to drive domestic demand, which will need a growth-cycle in employment and wages,” said Balasubramanian.