Vijay Kumar Gaba

 Recently, the growth in per capita GDP of India has been in the news. The government statistics claim that per capita income of India has almost doubled in the past nine years. This claim has generated intense discussion over the economic performance of the incumbent government; especially relative to the previous UPA government (2004-2014).

Without getting into a political argument and keeping the statistics aside for a while; I would like the popular debate to take the following into consideration:

·         The last census of India was done in 2011. Therefore all “per capita” data points are using an estimated number of the population. There is a possibility that the actual number could be different from the estimates.

·         In the past twelve years there have been significant changes in the socio-economic and demographic structure of the country. The youth population has increased materially. Millions of professionals (engineers, doctors, management & accounting professionals etc.) and other graduates have passed out of colleges and millions have dropped out of colleges. Not all of these are fully or partially employed.

Besides, demonetization of high value currency (2016), implementation of GST (2017), and Covid-19 pandemic (2020) accelerated the trends towards formalization the economy and digitalization of trade and commerce stressing millions of the micro and small businesses (mostly self-owned) and migrant laborers.

The rise in inequalities and dispersion of income and wealth must be factored while using “per capita” data to measure the welfare, quality of life and purchasing power of the bottom 75% of the population.

·         Traditionally, the primary sources of data on the workforce and employment have been the (i) decennial population census and (ii) nationwide quinquennial surveys on employment and unemployment by the erstwhile NSSO under the Ministry of Statistics and Programme Implementation. The latest Census data is available for the year 2011. Similarly, the quinquennium NSSO data on employment and unemployment is available up to the year 2011–12 only.

From 2017-18 National Statistical Office (NSO) of MoSPI started publishing Periodic Labour Force Survey (PLFS). PLFS data is published annually for both rural and urban and the total population; and quarterly for the urban households.

For the purposes of PLFS, the Labour force includes persons aged 15-60yrs who were either working (or employed) or those available for work (or unemployed). Some persons in the labour force may be abstaining from work for various reasons. Subtracting that number from the labour force gives the number of actual workers. These workers are further categorised as persons who are engaged in any activity as self-employed or regular wage/salaried and casual labour. The difference between the labour force and the workforce gives the number of unemployed persons.

As per the latest data NSO PLFS available (FY21), India has a low labour force participation rate of 41.6%. The rate is lower for urban labour force (38.9%) vs Rural labour force (42.7%); and for female workers (25.1%) vs male workers (57.5%). In urban India the female labour participation rate is dismal 18.6% vs still poor but higher 27.7% for rural female workers.

Clearly, (i) the data availability and quality is of not very high quality; (ii) employment conditions cannot be termed as good; and (iii) India is wasting the demographic dividend.

·         Unlike other developed economies, we could not create enough unskilled and semi-skilled jobs in the manufacturing and construction sector during the transition of economy from agrarian to industrial. In fact, unlike the US and Europe, we jumped from agriculture to services mostly skipping the industrial part. Now we are trying to fill the gap by encouraging manufacturing. However, the unfortunate part is that manufacturing is no longer labor intensive now. It is not feasible to transit a large number of unskilled or semi-skilled agriculture workers to industry or even construction. Consequently, there remains massive disguised unemployment in agriculture.

At the same time we do not have enough highly skilled people needed for globally competitive manufacturing. The corrective action to encourage manufacturing is thus not working well, at least so far. 

The only feasible way to correct the occupational structure of the country is to focus on accelerated development of the agriculture sector and make the farm workers more productive.

The union budget presented on 1^st February 2022 was widely hailed as growth supportive. Almost all experts and commentators opined that ~14.5% in budget capex would catalyze a new wave of infrastructure and industrial development and growth in the country. The finance minister highlighted the following four pillars of growth as the basis of her budget proposals.

1.    Accelerated development of world class infrastructure (PM Gati Shakti)

2.    Using digital capabilities for delivering inclusive development

3.    Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

4.    Crowding in private investment through enabling policy environment

Most strategists projected high growth for the infrastructure and capital goods sectors in the wake of great emphasis placed on capex by the finance minister.

However, collective wisdom of the markets did not concur with the enthusiasm of the finance minister and a majority of experts, as the funds allocations in the budget did not match the promise. The benchmark Nifty50 corrected over 5% in the five weeks following the presentation of the budget.

After one year, on the eve of another budget, the benchmark Nifty is almost the same level as it was a year ago. The promise of high growth made in the budget has been belied. Industrial growth (especially manufacturing growth) has collapsed in FY23. The latest NSO estimates peg FY23e industrial growth at 4.1% and manufacturing growth at a dismal 1.6%. Construction sector has also witnessed deceleration. Investment (Gross fixed capital formation) growth has declined to 11.5%.

In recent months some signs have emerged that indicate that the much awaited capex cycle might be just beginning to materialize and we might see some tangible outcome in the next couple of years. The budget for FY24 is therefore important in the sense that nothing is proposed in the budget which negatively impacts the nascent capex recovery in the private sector (also see Time for delivery is nearing). However, given the fiscal, economic and political constraints I shall not be expecting any material positives from the budget.

Some key highlights of the market performance since 2022 budget presentations are as follows:

·         Benchmark Nifty (1%) is almost unchanged since the last budget.

·         Small cap (-17%) have underperformed majorly. Midcap )-0.5%) have been almost unchanged since the last budget.

·         PSU Bank (~28%), FMCG (~21%), Metals (~16%) and Auto (~11%) have been the top outperforming sectors.

·         Media (-17%), Realty (-16%), IT Services (-14%) and Energy (-7%) have been the top underperforming sectors.

·         Infra (-1%) and Services (-3%) did not do much in the past one year.

Last week, the National Statistical Office (NSO) released first advance estimates of the National Income for FY23. These estimates are important because the budget estimates for FY24 would be based on these estimates. The finance ministry will use these estimates to project the GDP, savings, tax revenue, expenditure and allocations for various sectors of the economy.

Some key highlights of the data released by NSO could be listed as follows:

FY23 real growth (2011-12 prices)

• GDP (at 2011-12 prices) may increase by 7% to against 8.7% in FY22. This estimate is marginally higher than the RBI’s latest estimate of 6.8%.
• Per capita GDP may increase by 5.8% to Rs1,13,967, in FY23, against a growth of 7.6% in FY22.
• Per capita private consumption may be Rs65,237, a growth of 6.6% over FY22.
• FY23 Nominal Growth (current prices)
• GDP may increase by 15.4% to US$3.3trn, against 19.5% growth in FY22.
• Per capita GDP may grow by 14.2% to Rs1,97,468 (US$2394), against a growth of 18.4% in FY22.
• Per capita private consumption may grow by 15.1% to Rs1,18,580 (US$1437) in FY23, against a growth of 16% in FY22

FY23 Sectoral growth (2011-12 prices)

• Agriculture growth may accelerate to 3.5% (FY22 – 3%)
• Manufacturing growth may collapse to 1.6% (FY22 – 9.9%)
• Mining growth to collapse to 2.4% (FY22 – 11.5%)
• Construction growth to slow down to 9.1% (FY22 – 11.5%)
• Public administration and Defence expenditure growth to slow down to 7.9% (FY22 – 12.6%)
• Electricity, gas, water and other utility services growth accelerate to 9% (FY22 – 7.5%)
• Trade, hotel, transport, communication etc. to grow faster at 13.7% (FY22 – 11.1%)
• Financial services, professional services and real estate to grow by 6.4% (FY 22 – 4.2%)

FY23 Production growth

·         Rice, cement, Oil & gas, steel, telephone subscriber, cargo at ports, air passengers, railways, exports, mining, manufactured products etc. may witness material slow down in growth.

·         Commercial vehicles, passenger vehicles, bank credit may witness higher yoy growth as compared to FY22.

Key observations

• The estimates are based on the data available till November 2022 and may go under significant revision when the first revised estimate for the full year will be released in May 2023. These estimates seem to assume sharp recovery in manufacturing and some slowdown in services in 2HFY23. However, it appears unlikely that the industrial growth will accelerate enough in 2HFY23 to achieve 4.5% real GDP growth in 2HFY23. The lagged impact of higher rates, tighter liquidity and slower global demand (exports) may actually be more pronounced in 2HFY23.
• These estimates may however allow the government to project buoyant tax revenue in FY24, and accordingly provide for higher government spending and improved fiscal position in the union budget to be presented on 1^st February.
• The NSO has projected a trade deficit of 4.6% of GDP for full year FY23 up from 2.5% in FY22. This is worrisome, as the exports are likely to slow down further in 2023 as the world struggles to avoid recession.
• Real per capita private consumption expenditure of Rs65,237 read with huge income inequality indicators, is inadequate to support self-reliance of citizens and higher growth. The pressure on the government to provide basic necessities like food, housing, education, healthcare etc. will only increase going forward. This will (i) constrict investment; (ii) hinder development of quality human resources; and (iii) lead to even more socio-economic inequalities.
• The good part is that buoyant growth may save the finance minister from making the unpleasant decision of hiking taxes.

 State of the economy

The National Statistical Office (NSO) recently issued the first advance estimates (FAE) of GDP for FY22. This event is considered important, because these estimates are essentially used as input for preparing budget estimates for the next year (in this case FY23). The estimates are derived by extrapolating the previous year (in this case FY21) final estimates using the performance of sector indices in the first 7 to 9 months of the current financial year. These estimates may be subject to substantial revision in case of a material event that may impact the economic performance during the fourth quarter of the current financial year, e.g., lockdown during March of FY20.

FY22e Real GDP to grow 9.2%

NSO has estimated FY22 GDP to grow at 9.2% (-7.3% in FY21), lower than the recent estimates of RBI (9.5%).

Although the FAE accounts for slower growth (~5.6%) in 2HFY22 against 13.7% in 1HFY22, these estimates may not have fully factored in the impact of recent surge in cases of Covid and consequent mobility restrictions. Thus, there is a risk that the actual GDP might be slightly lower than FAE.

The GVA (GDP + subsidies on products – taxes) growth is expected to be 8.6%. This implies that NSO has factored in continuing buoyancy in tax collections in 4QFY22 also.

Most of the higher growth rate in FY22 could be attributed to the low base. As per the FAE, the real GDP for FY22 could be just 1.3% higher than the real GDP for FY20, implying less than 0.7% CAGR for 2years (FY21 and FY22).

Elevated inflation to reflect in higher nominal GDP growth

Elevated price pressures are expected to reflect in higher nominal GDP growth, which is expected to be 17.6% in FY22 (-3% in FY21). It is noteworthy that price pressure has remained elevated in FY22 across goods (food, fuel and others) and services.

 Private consumption continue to be sluggish

NSO has estimated private consumption expenditure to grow at a sluggish rate of 6.9% in FY22. This implies that the private consumption in FY22 will remain ~3% below the pre pandemic level (FY20). At 54.8% of GDP, the share of private consumption in real GDP is expected to be lowest in 8 years.

Besides, the key GDP component of Trade, Hotels, Transport and Communication is also expected to remain ~9% below the pre pandemic level (FY20).

It is pertinent to note that higher inflation of FY22 has so far not resulted in significant monetary tightening. Though the benchmark yields have seen significant rise in FY22 (from 6.05% in March 2021 to 6.6% presently), it has so far not reflected in lending rates. For example, SBI MCLR has remained unchanged during FY22 for most tenure.

Government consumption also to slow down

The consumption demand in the economy has been mostly driven by government consumption in crisis time. In FY22 government consumption expense is expected to slow down to 11.6% of real GDP from 11.7% in FY21; though it shall remain higher than 10.6% seen in FY20.

In absolute terms, government consumption is expected to grow 7.5% (at fixed prices) over FY21 and 15% in nominal terms.

Investment growth healthy

Investments are projected to grow at a healthy pace in FY22. NSO expects investments to be 29.6% of FY22 estimated nominal GDP, which is the highest level since FY15. In FY22, investment (Gross Fixed Capital Formation or GFCF) is seen growing 29%. It is also expected to be 18% more than in FY20

Economy expected to grow faster in 2HFY22

NSO expects over half of the projected growth in agriculture, industry and services to come through in 2HFY22. Considering the current state of pandemic led mobility restrictions, these estimates may have some downside risk.

For example, NSO estimates factor in 60% of the projected annual growth in the hospitality sector to materialize in 2HFY22. Clearly this forecast is at risk.

Similarly, 58% of the over agriculture output is expected to materialize in 2HFY22. Considering the inclement weather conditions across North and East India, this estimate may be at some risk.

External risk could rise

Though the balance of payment remained in surplus during 2QFY22, the external risks could rise if exports fail to pick up materially in FY23.

In FY22, BoP has been supported by a capital account surplus of US$40bn (5.3% of GDP) led by higher SDR allocation by the IMF; increased FPI debt inflows; FDI inflows, external borrowings and NRI deposits. However both FDI and FPI inflows have slowed down in recent months.

As per various estimates, a wider trade deficit ($190bn FY22e and $200bn FY23e) is expected to lead the current account deficit to 1.7% in FY22. Kotak Equity Research expects CAD to be 1.7% of GDP, and cautions that for every US$10/bbl increase in average crude price, CAD may increase by US$17 bn (0.5% of GDP). These estimates also assume inclusion of India in global bond indices and consequent $25bn debt inflows. Failing which, the pressure on INR may increase forcing RBI to intervene more aggressively.

Fiscal deficit contained

The government has been to contain the fiscal deficit in April-November 2021 period with the help of lower revenue expenditure, higher tax collections and dividends, and spectrum receipts. However, the disinvestment receipts are significantly lower than the budget estimates.

The lower fiscal deficit allows some leverage to the government to increase investment and consumption expenditure in the last quarter to support demand during the current phase of pandemic restrictions. If this is the case, the yields may continue to stay elevated and pressure on INR will sustain.

Conclusion

Though the Indian economy has recovered well from the shock of pandemic, the recovery is not broad based and continues to be fragile. On the supply side, the two key drivers of growth, i.e., manufacturing and exports continue to lag; whereas on the demand side private consumption continues to be vulnerable. This makes the policy making function rather challenging. Continued supply side constraints may keep the pressure on prices high; tightening the hands of RBI. A rate hike on the other side may hit the already sluggish demand even harder.

FY23 could be a struggle to attain balance between these counter pressures. Obviously the government will have a larger role to play in this and fiscal policy will become more relevant than monetary policy.