GDP growth data suggests a robust recovery

Economy-wide modelling while facing multiple exogenous shocks is clearly a task that is challenging and risky

The First Advance Estimates (FAE) for India’s gross domestic product (GDP) growth for FY24 surprises all. The Indian economy is projected to grow at 7.3 per cent, compared with 7.2 per cent in FY23. While this is much higher than the estimates made by most — maybe all — professional forecasters, what is pleasantly surprising is that this is higher than even the Reserve Bank of India’s (RBI’s) 7 per cent projection, which was seen as overly optimistic.  All professional forecasters might have to relook at their models and assumptions. This data also suggests that an economy-wide modelling while facing multiple exogenous shocks is clearly a challenging and risky task. 
 

Having said that, the RBI’s estimates broadly appear to be a little more consistent than other estimates. It is important, however, to understand that these official estimates are based on just two quarters of actual data; the numbers for the other two are based on forecasts using some high-frequency indicators (list is provided in the annex of the National Statistical Office press release). 

But what does the India growth story look like in the latest FAE for FY24? Considering data for both GDP and gross value added (GVA), it appears there might be slightly different conclusions if one looked at current and constant numbers. Given that there are lots of issues with regard to deflators used, it is fair to look at current prices and their share in the case of GDP and its components. 
 

In the case of GVA, constant prices and their growth rates should be considered. (It is important to understand why NSO provides only shares, not growth rates, with regard to expenditure components, and only growth rates for components of GVA). 

On the expenditure side, the story is very evident. There is a clear shift from consumption to investments. The share of both private and government final consumption expenditure has declined by almost two percentage points — from 68.4 per cent in FY23 to 66.5 in FY24. The decline is in both government and personal consumption. On the other hand, investment rate has improved marginally from 36.2 per cent to 36.9 per cent.   

The uptake in bank credit growth to commercial sector, at 15 per cent by mid-December 2023, and the Controller General of Accounts data, suggest that a pick-up in investment rate is contributed by both government and private sectors. In some sense, increasing the government’s capital expenditure appears to have a crowding-in impact on private investments, although with a long lag.  This should augur well for sustained recovery in the Indian economy if such a trend continues in FY25. GVA at basic prices in constant prices suggests that all sub-sectors except agriculture and trade group have shown resilience, with the mining and manufacturing sectors showing a sharper increase in growth rates compared to FY23.
 

But there are some downside risks to these numbers. With the cropping pattern data for the rabi season showing a decline from the previous year due to low reservoir levels and the full El Nino impact still not felt, achieving 1.8 per cent for FY24 is doubtful. Indeed, NSO could have used the area under rabi cultivation as an indicator instead of using crop production targets, which do not consider rainfall and other shocks. 
 

There are similar risks in using livestock and fish production target data. Another risk is with regard to global shocks affecting India’s services sector as well as exports growth, which has been in the negative for most of the months in FY24.

On the positive side, stable domestic financial markets with well-anchored inflation expectations and expected reduction in international interest rates should shift the balance in favor of the Indian economy in the coming quarters. In addition to these robust growth estimates, there is also data suggesting a decline in current account deficit (CAD) to 1.1 per cent.  While this seems good news on the face of it, empirical analysis does not suggest such an optimism. At least for an import-dependent country like India, low CAD and high growth is not consistent. 

Our earlier result suggests that a 1.5 per cent to 2 per cent CAD is consistent with 9 per cent GDP growth.  Hence, it is hoped that lower CAD should not be indicating lowering of the economy’s growth potential.  But, today’s numbers only suggest India would continue to be the fastest-growing large economy for more time.  
 

The writer is vice-chancellor, Dr BR Ambedkar School of Economics University, Bengaluru. Views are personal.