FY22 GDP estimates: Some surprises in the internals

The NSO has been quite consistent in its GDP projections for the year. After revising the FY21 numbers earlier, the growth rate for FY22 stands now at 8.9% instead of 9.2% earlier. It was 8.8% earlier and hence, there has not been a significant revision. There would also be a rather wide price deflator with the GDP in nominal terms increasing by 19.4%, thus yielding a double digit number which is closer to WPI inflation. A question raised is whether CPI inflation is the right index to target for monetary policy.

But this also means that based on the 9 months growth so far, there would be low growth of 4.8% in Q4FY22 indicating that there will be a slowdown from Q3.

This has been achieved through a base effect numerically as all sectors have done much better than that last year. This is the positive takeaway from the estimates. The figures on capital formation, however, appear optimistic as the gross fixed capital formation rate is to increase from 26.6% to 28.3%, which is not supported by the activity in the debt and credit market. While the central government has committed to higher capex this year, one cannot be too sure of the states or the private sector.

Simultaneously, the share of consumption and government expenditure has come down in FY22, which is reflective of the economy not yet being fully back on track. The lower share of households’ consumption is a concern because this has to be the main engine to growth as has been reiterated by the Economic Survey. Lower consumption levels is also reflective of the state of employment, which has not been steady as the unemployment rates have tended to be high. The other worrying factor is the continuous increase in the share of valuables during the last two years which is a reflection of people moving over to gold in uncertain times. This is not good for savings.

The third quarter numbers are interesting. The picture is different across sectors: agriculture, manufacturing, construction, and finance have witnessed lower growth rates this year compared with last year. Construction growth has declined while manufacturing has just about been positive at 0.2%. This does come as a surprise because it was expected that the pent up demand story caught on in this festival season and that most companies did say in their corporate presentations that there was a recovery. However, IIP growth remained feeble, which reflected this sentiment. But profits of corporates has been buoyant and should have gotten reflected in better growth numbers. Even in case of construction, the government spending has been steady and it is probably the sale of inventory that was more vibrant than new construction.

The sectors that show higher growth are mining, electricity, trade transport and public administration etc, the latter two have been more on account of the base effect with negative growth being witnessed last year.

The job is still not over and FY23 does need a fresh impetus. Based on these numbers, the growth in the fourth quarter would be lower at 4.8%. There is need to push up both investment and consumption. The budgetary push will provide support from the government’s end. But the main booster has to be from the private sector. Hence, demand conditions have to be more broad-based with the consumer goods segment contributing significantly to overall growth.

The author is Chief Economist, Bank of Baroda and author of 'Hits & Misses: The Indian Banking Story'