Growth challenges

Manufacturing sector decline needs policy support

With the release of India’s economic growth numbers for the July-September quarter of 2022 on Wednesday, the Centre’s challenges in managing the economy have become a little more formidable. These numbers have also underlined the economic imperative of presenting an appropriate Budget next February and realistically assessing the growth prospects for 2023-24 in the light of the emerging economic headwinds. According to the National Statistical Office, India’s gross domestic product (GDP) in the second quarter of 2022-23 grew 6.3 per cent in real terms, declining sequentially from 13.5 per cent in the previous quarter. It was low even compared to the growth of 8.4 per cent in the July-September quarter of 2021. Quite apart from deceleration in growth, which reflects the relative slowdown and the higher base effect, the July-September GDP number makes the task of achieving the target of notching up a 7 per cent growth rate for the full year a bit difficult, although not out of reach. The first half of 2022-23 has recorded a growth rate of 9.7 per cent and the Indian economy must grow at least 4.6 per cent in the second half, a task that would not be impossible but challenging, given the global headwinds on account of an economic slowdown in developed economies, elevated inflation, rising interest rates, and slowing exports.

A key worrying aspect of the latest national income numbers pertains to the performance of the manufacturing sector. The second quarter of 2022-23 saw manufacturing sector output decline by 4.3 per cent. Even the mining sector had a contraction of 2.8 per cent. The output decline in manufacturing and mining reflects weaknesses in India’s industrial sector as also challenges it poses for creating jobs. Without a vibrant manufacturing sector, the tasks of creating more jobs would remain unfulfilled. The unfinished agenda on factor market reforms, particularly with regard to labour policy changes, must receive priority attention. The sharp deceleration in construction growth is also a reminder of the need for labour policy reforms, even though its performance in the second quarter can be explained by seasonal factors. The bright spots in the economy were agriculture, where growth was healthy at 4.6 per cent, and energy as well as utility services, where the double-digit growth rate of over 14 per cent was indicative of the return of the contact-intensive sectors with a gradual retreat of Covid-19. On the expenditure side, private consumption growth was healthy at 9.7 per cent, but government expenditure, which fell in the second quarter, was disappointing, which is largely because of the government’s tight leash on its spending during the first half of the current fiscal year. Another positive indication was the investment climate in the economy, which was captured in the numbers for gross fixed capital formation. This has been doing well in recent times and its continued growth at 10.44 per cent in July-September 2022 augured well for economic growth prospects. But the challenge before the Indian economy arises more from external factors like global demand. Exports growth has already begun to decelerate and the policy on both the exchange rate and tariff fronts must be geared to supporting merchandise goods exports. More importantly, if the economy has to gain from a higher investment rate, it will be necessary to present a Budget that continues to spend more on infrastructure creation while rationalising exemptions and concessions in the taxation system to sustain tax revenue growth.