Key takeaways from GDP data
Many sectors have surpassed pre-pandemic levels, but there are some worrying trends
The economy slowed in the last quarter of 202122 under the impact of the Omicron-driven third wave of Covid-19, as it was expected to, but still beat analyst expectations. In numerical terms, the Gross Domestic Product (GDP) grew 4.1% in the quarter on an annual basis, slower than the 5.4% it grew at in the previous quarter. The 4.1% was also the slowest rate of expansion in four quarters. For 2021-22, the economy grew 8.7%, compared to a 6.6% contraction the previous year. Importantly, nominal GDP grew 19.5%. Most sectors grew smartly in 2021-22 — agriculture by 3%, mining by 11.5%, manufacturing by 9.9%, construction by 11.5%, and financial services by 4.2%. Investment growth was largely powered by the government, which almost met its challenging capital expenditure target.
While it is evident that many sectors of the economy surpassed their pre-pandemic levels, there are some worrying trends evident in the data released Tuesday — manufacturing contracted by 0.2%, compared to a 0.3% growth the previous quarter — and among the most concerning is the fact that the fourth quarter data show the overhang of inflation and lower corporate profits on account of higher input prices. The big question is not what the numbers say about 2021-22, but what they do about 2022-23, especially given the government’s limited ability to enhance its fiscal spending (although the fiscal deficit came in at 6.7% of GDP, lower than the estimated 6.9%, on the back of higher revenue). Private consumption remained weak in the last quarter (strong government consumption was the main driver of consumption), making it difficult for companies to pass on their higher costs on to consumers, and high-frequency indicators continue to highlight the K-shaped nature of the recovery, with small enterprises and the poor continuing to languish.
While the government has unveiled measures to tackle inflation, it is almost a given that the number will remain above the upper band of the Reserve bank of India (RBI)’s tolerance level of 6% (and that RBI will raise rates again next week). Crude oil was trading at around $124 a barrel on Tuesday, although the price of India’s import basket will likely be lower. Reining in inflation, without smothering nascent demand is going to be the government’s biggest challenge in 2022-23, although it can take some heart from Tuesday’s forecast by the weather office of a normal monsoon. And with companies focusing on costs (and waiting for demand to pick up), it will still have to do the heavy lifting on investments.