Growth adjustments

Weak consumption demand is a risk

The first advance estimates (FAE) of national income for this financial year (2023-24), released last week by the National Statistical Office (NSO), surprised most economists on the upside. This was despite most projections already being adjusted for the higher than expected growth outcomes in the first two quarters of the financial year. According to the NSO estimates, the Indian economy is expected to grow 7.3 per cent in real terms in 2023-24, as against 7.2 per cent last financial year. The Reserve Bank of India’s Monetary Policy Committee revised its growth projection for the year to 7 per cent in its December meeting after the economy expanded 7.7 per cent in the first half of the year. The government’s projection suggests deceleration in the second half would be much slower than being projected by professional forecasters.
 

While the headline real growth number will boost confidence in the Indian economy, policymakers in the Ministry of Finance (MoF) may still have to make adjustments because of low nominal growth. The economy in nominal terms is expected to expand by just 8.9 per cent. The basic purpose of these estimates is to enable the MoF to make revised estimates for the current year and Budget estimates for the next financial year. Notably, the MoF had assumed a nominal growth rate of 10.5 per cent for this financial year. Since the size of the economy is expected to be smaller than projected, even if the government contains the fiscal deficit at the targeted level in absolute terms, it would overshoot the number as a percentage of gross domestic product (GDP).
 

With a lower base, the fiscal deficit would come at 6.02 per cent of GDP, which will be marginally higher than the 5.92 per cent projected for the financial year. Given the revenue and expenditure position as of now, the government is confident of meeting the target. The MoF, notably, has been fairly conservative in projecting nominal growth in recent years, which helped it manage finances better. But since the economy is expanding at a slower pace at current prices this year, it would be interesting to see the projection for next year. It is worth noting that growth estimates could be revised significantly because they are based on very limited data. The estimates, as the NSO has underscored, use data from various sectors, some of which are available only till September.
 

Nonetheless, assuming actual numbers are close to the FAE, slow growth in private consumption, at 4.4 per cent, is worrying. Gross fixed capital formation is expected to grow 10.3 per in 2023-24. While investments are growing at a healthy pace, they might come under pressure because of low growth in private consumption. The private corporate sector, for instance, would be reluctant to invest heavily if consumption demand remains weak. Meanwhile, it would also be difficult for the government to sustain increasing capital expenditure as it moves ahead with fiscal consolidation. The Union government intends to bring down the fiscal deficit to below 4.5 per cent of GDP by 2025-26, but that would still be on the higher side. Therefore, the government’s challenge in the Budget and beyond would be to boost consumption and sustain investment, while moving forward on the fiscal consolidation path.