Statsguru: Six charts show Indian economy's structural constraints

The Reserve Bank of India (RBI) last week announced a 40 basis points increase in the policy repo rate. The rate revision came after two years when the central bank had reduced the rate by a similar quantum. 

The rate increase came at a time when the economy was showing signs of revival. The RBI will now have to balance inflation and growth, esp­e­cially as the pandemic has exposed structural weaknesses in the Indian economy. 

While the corporate sector performed better, which is evident from the stock market performance, a recent RBI analysis in its Report on Currency and Finance showed that the pandemic battered weaker firms fur­ther. Overall, profitability (measured as a ratio of profit after tax and aver­age total income) increased, but for the weaker firms loss ratio widened from 0.3 per cent to 1.5 per cent (chart 1). 

The unorganised sector faced the damage. Value added by house­holds within manufacturing went down 17.3 per cent in 2020-21, comp­ared to a 3.8 per cent deceleration witnessed in 2019-20. Corporate value added within manufacturing inc­reased by 1.7 per cent in 2020-21, but was considerably lower than the levels witnessed before 2019-20 (chart 2).

Meanwhile, general government debt has also climbed up, and RBI estimates show that it is unlikely to fall below 80 per cent within the next five years (chart 3).

Exports of goods and services increased as India took advantage of constrained supply lines during the pandemic. Still, the dynamic foreign trade multiplier (FTM), which impacts gross domestic product growth, weakened again. The exports of goods and services increased 21.1 per cent in 2021-22, but the increase in the income elasticity of imports weakened the foreign trade multiplier (chart 4). 

The RBI report stated that India would need to boost exports further and carry out import substitution. Another area of concern is the share of capital goods in India’s imports. Although the share of capital goods in India’s imports increased in 2019 compared to a decade earlier, India still has a relatively low share compared to other developed and developing economies (chart 5). 

Further, a significant constant is credit growth. While credit growth has just started to pick up, a rate rise may impact offtake (chart 6).

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines