This is partly because while GDP, as a measure of the monetary value of goods and services produced in an economy over the course of a year, falls squarely within the realm of macroeconomics, it is a whole different ball game when it comes to interpreting GDP. Numbers. Interpretation is almost always in the realm of political economy. And that, of course, opens a Pandora’s box.
Remember the fierce debate a few years ago about whether economic growth was faster under the UPA or NDA government. This debate remains inconclusive because, like all comparisons, much depends on what one takes as starting and finishing points, and on caveats of all kinds. The intensity of the debate may be less fierce today, in part because Congress is a mere shadow of what it was in 2014. But opinions are likely to vary across the board. of the spectrum.
Proponents of the current exemption are likely to consider the downward revision to GDP growth for fiscal year 2022 (from 9.2% earlier to 8.9% now) and the third quarter growth estimate (5.4%) as evidence of recovery, explaining the slowdown in the pace of growth as driven by the base effect. Others, not necessarily critical, are likely to see those same numbers as reinforcing their hypothesis of an uneven (K-shaped) recovery, where some sectors of the economy recover while others continue to struggle. Still others, including myself, are likely to view the numbers more ominously – as further evidence of a W-shaped recovery where a slower recovery in some sectors is dragging down the overall growth rate.
It’s another matter that Nirmala Sitharaman, in an interview with ET Now shortly after the budget, refused to get drawn into a discussion about the form of the resumption. And Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, questioned the very concept (bit.ly/3Mb0xeI).
A new vision of the world
Yes, it doesn’t matter that the cover adapts perfectly to the shape of a letter of the English alphabet – or, as Debroy seems to prefer, of the Greek alphabet. And, to be fair, macro numbers often hide more than they reveal. Unfortunately, a look at the granular data adds no joy. The sector numbers show, indisputably, what the anecdotal evidence has always shown: the pace of recovery has been uneven across sectors. Worse, sectors such as construction (-2.8%) and industry (0.2%) which provide jobs to people at the bottom of the pyramid have suffered particularly badly. In fact, had it not been for a strong increase in public administration, which increased by 16.8%, growth would have even been less than 5.4%.
Fortunately, all is not gloomy. After months of dithering, the GoI announced its intention (in the budget) to spend big on infrastructure. This should help create much-needed low-skilled construction jobs. On top of that we have hopefully seen the end of Omicron, the vaccination program has been a great success and the forecast so far is for another normal monsoon. Many of the earlier initiatives – GST, digitalization, to name but two – have reached critical mass and should start to bear fruit. More aggressive non-tax revenue mobilization through asset monetization and programs such as the Production Linked Incentive (PLI) and Progressive Manufacturing Program (PMP) should create jobs.
The concern is that the outlook is clouded by rising geopolitical tensions, and the impact this is likely to have on commodity prices, particularly oil, and therefore on inflation and growth. This upset all the budget calculations carefully worked out by the Minister of Finance. Compared to an oil price of around $75 a barrel assumed in the Indian government’s calculations for 2022-23, oil today is hovering at $100 a barrel. An inflated bill for inelastic imports (80% of our oil needs are met by imports) will increase our current account deficit (CAD) and potentially join capital outflows in response to US Federal Reserve tightening. This is likely to weaken the rupee, adding to inflationary pressures.
India’s GDP grows by 5.4% in October-December 2021 quarter
India’s GDP growth slowed to 5.4% in October-December 2021, from 8.5% in the previous quarter, according to data released on February 28 by the Ministry of Statistics and Program Implementation. .
V for RecoVery
It is estimated that every $10 rise in oil raises inflation by almost half a percentage point. It doesn’t help that RBI is terribly behind the inflation-control curve – wholesale price inflation has been above 10% for nine consecutive months. There is ample empirical evidence that high inflation rates have a negative impact on long-term growth.
Clearly, the best-laid plans of infrastructure spending boosting investment – and, through its multiplier effect, growth – could be undone if rising oil prices mocked the Indian government’s budget calculations. But we cannot declare the economy out of the woods until the recovery is widespread. Especially since the sectors that are lagging behind are also those that employ large numbers of people who are mostly at the bottom of the pyramid.
So our best bet for now is to focus on turning this misshapen W-shaped rally (see chart) into a V by focusing on sectors and sections that did not participate in the rally.