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The Improvement in GDP Growth

Context

  • According to NSO data, India’s GDP increased 13.5% in the April-June quarter of the current fiscal year (FY 2022-23), up from 4.1% in the previous quarter but less than the 20.1% reported in the first quarter of 2021-22.
  • This means that the Indian economy grew at its fastest rate in a year (though at a slower rate than the RBI’s estimate of 16.2%), aided by a favourable base effect and robust growth in agriculture, services, construction, and private consumption.

Relevance

GS Paper 3: Define potential GDP and explain the factors that influence it. What are the factors preventing India from reaching its full GDP potential?

Mains Question

Define potential GDP and explain the factors that influence it. What are the factors preventing India from reaching its full GDP potential? (250 Words)


Growth is slower than expected:

  • In the face of persistent global challenges caused by the Russia-Ukraine conflict, the Indian economy is seen as resilient.
  • The Reserve Bank of India (RBI) predicts that the Indian economy will grow at a 16.2% annual rate in the first quarter of fiscal year 2022-23.
  • As a result, recent GDP figures disappointed many.

GDP rises above pre-Covid levels, but challenges persist:

  • GDP has surpassed pre-pandemic levels, indicating that the economy is no longer subject to Covid shocks, but recovery in some sectors remains elusive.
  • GDP tracks total demand to calculate the value of total output in the economy.
  • The Russian invasion of Ukraine has created new challenges for the global economy.
  • For example, the United States is already experiencing 40-year high inflation rates and two consecutive quarters of GDP decline, whereas China is experiencing a significant economic downturn as a result of its zero-Covid policy to combat viral spread.
  • When two of the world’s largest economies are experiencing such economic downturns, fears of spillover effects are bound to affect India as well.

Manufacturing and mining are underperforming:

  • Manufacturing GVA growth slowed sharply to 4.8% in the third quarter, down from 49% the previous year.
  • The amount of value added (in monetary terms) in various productive areas of the economy is examined by GVA.
  • GVA growth in the mining and construction sectors has also slowed.
  • This demonstrates how rising global input prices have impacted key import products, reducing a company’s profit margins.

Demand for services is shifting:

  • The services sector accounted for more than two-thirds of the growth. GVA growth in the services sector – trade, hotel, transportation, communication, and broadcasting-related services – was 25.7% in the first quarter.
  • Data show that there is strong demand for services, as well as a shift in demand from goods to services as the pandemic fades.
  • Despite the fact that the global recession will have an impact on exports, this is to be expected.

Consumer demand is low:

  • Consumer spending growth slowed to 2.6% year on year in the April-June quarter, down from 12.3% the previous quarter.
  • Rising food and fuel prices have had a significant impact on consumer spending, though monthly inflation has slowed in the last three months.
  • Higher energy and commodity prices are expected to have an impact on consumer demand as well as business investment plans in the coming months.

In April-June, the unemployment rate falls to 7.6%:

  • The urban unemployment rate for people aged 15 and up fell to 7.6% in the April-June quarter of 2022, as economic activity increased following the removal of the Covid-19 limits.
  • According to the PLFS for the April-June quarter, the labour force participation rate (LFPR) increased slightly from 47.3% in the January-March quarter to 47.5%.

Finally, consider the following:

  • The first quarter saw exceptionally strong gross fixed capital formation and private consumption, indicating that the economy is doing well.
  • India’s first-quarter GDP growth rate is currently significantly higher than that of other major economies. China’s first-quarter GDP growth rate, for example, was 4.8%.
  • Despite the global slowdown, India is expected to remain the world’s fastest growing major economy.

NSO (National Statistical Office):

  • NSO is the Statistics Wing of the Ministry of Statistics and Programme Implementation of the Government of India.
  • The NSO is the nodal agency for the planned expansion of the country’s statistical system, establishing and upholding statistical rules and standards.
  • Every month, it compiles and publishes the Index of Industrial Production (IIP), conducts the Annual Survey of Industries (ASI), and provides statistical data to assess and evaluate changes in the growth, composition, and structure of the organised manufacturing sector.
  • The NSO launched the Periodic Labour Force Survey (PLFS) in 2017, recognising the importance of having labour force data at more frequent time intervals.
  • Each year, the NSO publishes four quarterly GDP data updates to assist observers in assessing the current state of the Indian economy.
    • Each such release includes data for two variables in the economy: total demand and total supply.

What RBI Should be concerned about

  • Given that this year’s monsoon has distributed rains in an erratic scattershot pattern that has caused disruptive flooding in some parts while leaving key paddy and pulses growing areas in northern and eastern India moisture deficient, both farm output and consumer spending in the rural hinterland are likely to take a hit.
  • And with global trade also becalmed amid the sharp slowdown in advanced economies, India’s merchandise exports are sure to weaken in momentum, any benefits from the rupee’s depreciation against the dollar notwithstanding.
  • With the RBI needing to stay laser focused on taming inflation, the onus is on fiscal authorities to spur consumption and investment.

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September 2022
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