Under pressure

Risks to growth have increased

The estimates of gross domestic product (GDP) for the first quarter this financial year, released by the National Statistical Office on Thursday, would not please most analysts. Growth for the quarter, at 7.8 per cent, was lower than the rate projected by the Reserve Bank of India (RBI) at 8 per cent. Some private-sector economists were expecting growth above 8 per cent. In terms of sectoral performance, the agriculture sector grew 3.5 per cent year-on-year (Y-o-Y), though sustaining growth would be difficult, given the prospects of deficient rainfall. The manufacturing sector expanded 4.7 per cent Y-o-Y, which was disappointing. Financial, real estate and professional services, on the otherhand, witnessed a robust growth rate of 12.2 per cent. Overall GDP during the quarter was about 13.8 per cent higher than the pre-pandemic level.

Consumption expenditure growth during the quarter was lower than overall growth, but capital formation increased about 8 per cent, which should be encouraging. Overall growth, however, is expected to moderate in the coming quarters. The RBI also expects growth to come down in every quarter and settle at 5.7 per cent in the fourth quarter of the financial year. Despite the anticipated decline in momentum, risks have increased. The possibility of a deficient monsoon could affect food production, resulting in lower income and demand in rural areas. Lower food production could also keep inflation elevated, which can affect the discretionary spending of households. If food inflation begins to get generalised, the Monetary Policy Committee would need to intervene with policy action, which could slow the pace of economic expansion.

On the fiscal front, electoral considerations could increase spending on the revenue account. The government, for example, this week reduced the price of liquefied petroleum gas cylinders by Rs 200. A possible reduction in the prices of petrol and diesel would increase fiscal pressure. The government finance numbers, released separately, showed that the fiscal deficit at the end of July 2023 was at 33.9 per cent of the Budget Estimate, compared to 20.5 per cent during the same period last year. The flow of tax revenue has slowed, but an increased demand on the Budget could make containing the fiscal deficit within target more difficult. To its credit, the government has managed to frontload its capital expenditure. A reversal in this context to contain the deficit would negatively affect growth. Notably, in the first quarter of the financial year, there was only a marginal difference between real and nominal GDP growth, largely because of the low wholesale price index-based inflation rate. This means that the government may not benefit from a higher denominator to increase spending while maintaining the fiscal deficit within the target as percentage of GDP. Increased pressure on the fiscal front in the coming quarters could become a drag for growth.

Furthermore, while the global economy has been comparatively resilient so far, things could change in the coming quarters, partly because of a slowdown in China and increasing risks in its financial system. Interest rates in large developed markets are expected to remain elevated, which would affect demand for Indian exports. Thus, given the combination of factors, attaining a growth rate of 6.5 per cent this financial year, as projected by the RBI, will be challenging.