The first advance estimate of GDP growth for FY23 is somewhat comforting because it is in line with what the RBI had forecasted. In fact, it is slightly better at 7 per cent. But these numbers need to be read with a bit of caution because they are based on extrapolations of numbers for various sectors, based on the latest available information, which could be up to November for some variables. As value added is proxied by corporate results, which are available for the period from April to September, the extrapolation will stretch for six months. Normally, the final numbers are within this range and so we could expect them anywhere between 6.6-7.2 per cent, although they normally tend to be lower.
How is one to read these numbers? The growth rate of 7 per cent is based on growth of 6.7 per cent in value addition across eight sectors and 0.3 per cent in net taxes. The net taxes growth is only 0.3 per cent because while indirect tax collections have been robust, the subsidy bill has overshot for both food and fertilisers and slightly for fuel. The growth rate is satisfactory nonetheless, as this will still make India the fastest-growing large economy. The growth rate is also similar to what the World Bank had stated in its update and so it puts to rest the class of critics that had doubted the growth story.
Of the eight sectors that contributed to this growth, most showed expected trends. The manufacturing sector is disappointing — it is expected to grow by only 1.6 per cent. The proxies used here are the profit numbers of corporates in this sector to represent the organised sector and the IIP growth to capture the SME sector. It is known that corporates were hit hard by rising input costs and while they have started passing them on to the consumer in the interim period, their profit lines have been affected. This has been a challenge for India where growth was not coming from manufacturing even before the pandemic hit. The SMEs are still struggling to stay afloat and with a recession in the West, they have been affected as they have a significant share in exports (about 35-40 per cent). Clearly we need to review the manufacturing sector and its potential because it is accepted that most jobs are created in this sector, and so it has to be the engine and not carriage of the growth train.
The trade, transport etc. segment was very impressive with a growth of 13.7 per cent. This comes on top of a double-digit growth number in FY22. While this bump up has been supported by a sharp fall in FY21 (the base effect), the sector received a boost due to the opening up of Covid restrictions after April 2022. Thus the pent-up demand can be seen in travel, tourism, dining, logistics (for online delivery) etc. Hence, it has been a strong part of the story so far. This is notwithstanding the sharp increase in prices for all these services due to rising input costs, which does raise the question of whether it would be possible to maintain the tempo of growth in FY24.
The other sector which has done well is construction with 9.5 per cent growth over 11.1 per cent last year. Here two factors have worked. The first is the government push on infrastructure, especially roads. The other is again pent-up demand for residential property which is also supported by the sharp rise in bank credit to this segment. In fact, banks have been aggressive here as retail lending is considered to be less risky than corporate credit. Both these factors have provided an impetus and presently there is no reason to expect a slowdown provided the government perseveres with its effort to push capex.
Agriculture shows a reasonable growth of 3.5 per cent which is good, because there has been some skepticism on whether the rabi crop would be affected by the late departure of the rains. As this is not expected, growth of 3.5 per cent is comforting even though we have not seen any sharp uptick in rural demand so far for the consumer goods industry.
The positive surprise factor here has been an increase in expected gross fixed capital formation rate — from 28.6 per cent to 29.2 per cent. This could be an overstatement because the funding counterpart, that is bank credit, does not support this phenomenon. Therefore, it needs to be seen if this finally materialises.
The NSO also presents the nominal GDP numbers where growth is to be 15.4 per cent, which means that the inflation deflator would be closer to 7.4 per cent. Higher growth this year brings the GDP to Rs 273 lakh crore. Under normal conditions this would not have been important. But, the budget for FY22-23 was drawn on a GDP number which was lower. This means that with a higher denominator, if the government maintains its fiscal deficit at the targeted level, then the fiscal deficit ratio can actually come down. This will be a boost for the budget for sure. Hence a deficit of Rs 16.61 lakh crore will translate to a fiscal deficit ratio of 6.1 per cent as against a targeted 6.4 per cent.
Also, with a higher GDP base, the budget for FY24 can target a growth rate of 11-12 per cent, which will in turn afford more space for a fiscal deficit in absolute terms. Therefore, the same level of fiscal deficit, if retained, can bring the ratio down to 5.5 per cent. If the government targets a ratio of 6 per cent then it can run a higher deficit of Rs 18-18.5 lakh crore.
Therefore, these numbers on growth forecasts for FY23 should be satisfying for the finance ministry when the budget is drawn up. It must be remembered that next year it is widely expected that real GDP growth rate will probably slow down to 6-6.5 per cent as the impact of world recession sets in. Concomitantly, the inflation rate will also come down to a more bearable 5-5.5 per cent. By taking a fiscal deficit ratio of, say, 6 per cent, the government could get more room for capex which is what industry is asking for. The government would also probably have some space in terms of not spending much on health this year now that the vaccination programme has virtually ended.
February will be an important month, as the two big policies — the Union budget and the monetary policy — will be announced in the first week, and will set the tone for the rest of the year.
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