Economic forecasting is fraught with the perils of excessive noise: Mint June 29 2023

 

Contrary observations in minutes of Monetary Policy Committee: Financial Express 24th June 2023

 The MPC minutes are significant as they reveal the thought processes that have gone in when the members have taken a decision on rates and stance. This is a progressive move in transparency as one gets to read about the arguments on both sides. Given that economists are known to have varying views on how the economy will turn out, it is but natural that reaching a consensus is always a challenge. Yet, ever since the MPC was constituted, there has generally been a consensus and there has never been a case of an even number for both the sides of the argument, which would have led to the governor exercising his prerogative.

The minutes of the last monetary policy are interesting as there is unanimity on the repo rate, but not the stance. This was also the opinion in the earlier policy too, with one of the experts having a different view on the stance. However, the commentary made by the dissenting expert is interesting.

There have been some interesting comments made by one of the independent members which send mixed signals. In fact, when going through the statements made by way of his opinion, certain questions are raised. This is something which can puzzle the market as the view taken on both inflation and growth seems rather unclear.

The member starts by saying that the outlook on inflation and growth has changed only marginally since the last policy, which can be interpreted as being a good sign. More significantly, it is stated that the two concerns which were highlighted by the member in the last policy are less important today. One is crude oil matrix and the other monsoon prospects.

For oil, it is argued that there are few chances of any spike in the price in near term based on the evolving dynamics of the market. In case of monsoons, there is less concern on any adverse impact on the economy though the weather department has projected even chance both ways.

Against this background, it has been logically concluded that the situation does not warrant a change in the repo rate which was also the majority view. More specifically, it is argued that the present level of repo rate is good enough to ensure that inflation will be below the thresholds that the MPC has to protect and will also drive it towards the middle part of the band. This gives the impression that all is under control. However, there is a caustic statement made subsequently that he is not comfortable with the ‘self-congratulatory tone’ in the MPC statement on inflation. Here he again points to significant risks to both inflation and growth.

Hence, the member blows hot and cold over whether the economy is now comfortable with growth and inflation. This goes counter to the statement that the two major risks highlighted relating to the oil prices and monsoon are not really significant. Now this can be interpreted as there still being risks to inflation in which case there could be an argument for raising rates further. But doing so would also mean that it will come in the way of growth, which is something on which other members too have opined their reservations. Therefore there are mixed signals here on whether the worst of inflation is over or not.

Further, the member also seems to be critical of the stance of withdrawal of liquidity which he probably alludes to being unclear as he refers to it as ‘whatever that phrase may mean’. This has been the view taken even in the past meetings and hence there may be reason for the MPC to explain the meaning in more definitive terms. Is it a case of surplus liquidity in the system that needs to be drawn out? Or is it a case of real interest rates being high or low or appropriate? At any rate the view was that the stance was disconnected with reality and by maintaining the same ‘it can inflict significant damage to the economy’. The reason presumably is that a real repo rate of 1.5% can come in the way of the growth process.

But, it was seen in FY23 that the high interest rates did not quite stifle growth which came in at 7.2%. Therefore, the continuation of the stance of withdrawal of liquidity cannot really impede growth. A stance is not an action like a repo rate hike or cut but a signal to the market on how the central bank or rather the MPC thinks the economy will behave. At the ground level the market looks at it as a prelude to a change in the position on repo rate.

The RBI’s position, on the other side, however, is quite unambiguous on the subject where the interpretation is that inflation though under control has to be monitored as the El Niño in particular can create disruption. Liquidity is still in surplus and there is some time to go before inflation will come down to 4%. Therefore a rate pause to gauge how the 250 bps rate hike has worked out is pragmatic.

The Importance of Monsoons in India: Free Press Journal 24th June 2023

 

The Importance of Monsoons in India

All crops which are grown once a year have to be held by wholesalers and retailers for the entire period until the next crop arrives, and hence putting curbs only impedes trade

The monsoon situation is always of interest for the country because it has a bearing on almost 50% of the agricultural crop output that is produced. With almost 60-70% of the crops being rain-dependent, the monsoon becomes critical when evaluating prospects. It affects potential output, rural income, prices, industry prospects as well as policy. How will this play out?

The immediate sign of climate change observed in the last few years has been the pattern of the monsoons. What used to begin in the first week of June has now become prolonged towards the end of June, and often even to early July. Once the monsoon arrives it normally could take 20-40 days for the entire country to be covered. The pattern has changed and the monsoon arrives 3-4 weeks later and also withdraws in October-November rather than September. This is something farmers have to accept and must make adjustments for, accordingly. 

It becomes critical because sowing decisions are taken based on the arrival of the monsoon as this is the critical time for availability of water for the crop. A delayed monsoon with uncertainty on its progress means that farmers can switch to crops which have lesser requirement of water or have a shorter flowering season. This has been observed in the past as farmers switch from soybean to cotton, or from tur to an oilseed like groundnut to ensure that they have their crop going. This becomes important because almost every crop is grown once a year and the income received during harvest has to be used through the entire year (in the absence of any alternative income stream) until the next crop is harvested. Therefore to manage liquidity and often debt as well, crop shifting becomes a good option. This is why the timing is relevant because any switching of crop also means a different income stream as cost of cultivation differs across products. 

Now the entire optimism on the Indian economy doing well this year with growth of 6.5% projected by the RBI and other forecasts being in therange of 6-6.5% is premised on agriculture doing well this year. It is important for two reasons. The first is that a good harvest is necessary to ensure that supplies are in order which act as feedstock for industries like edible oils, textile, packaged food, hospitality etc. The other is that thekharif harvest will determine the state of the farmers’ income. Rural demand emanates mainly from this segment which has a share of 40% or so in rural GDP going by market sources. Hence this will be a major determinant of demand in the post-harvest festival season when spending peaks. 

Therefore, the final kharif outcome will have a bearing on GDP growth prospects on both the demand and supply sides. Under normal monsoonconditions agriculture could be expected to grow by around 3.5% this year which has been the case in the past. However, any shortfall in rainfall can push this back to the region of 2-3% which in turn will have a negative impact on GDP growth. While it is hard to know the share of rural demand in total for consumer goods, it has been observed that lower income does set back aggregate demand considerably as stated by companies in this space. Demand was impacted due to inflation in the last three years and hence it is imperative for the crops prospects to be good. 

The vulnerable regions are the interiors which come in the rain shadow areas, largely in the Deccan Plateau area. These include regions in thestates of Maharashtra, Tamil Nadu, Karnataka, Telangana and Andhra Pradesh. It must be remembered that these states have access to irrigation from rivers like Godavari and Krishna which are however rain-fed and not snow-fed like the Ganga. The crops which become susceptible to swings would be tur, moong, urad, soybean, cotton, groundnut and millets. Further, the cyclone in Gujarat and Rajasthan had thepotential to impact prospects of crops like spices and groundnut, which is still being assessed. Therefore, there is need to be mindful of thesituation here. 

From the policy standpoint kharif harvest becomes important because inflation has been a major consideration for monetary policy. While the inflation number has come to less than 5% in the last two months and will probably remain in this range till September, a sub-normal monsoon can upset these projections. Price pressures have already been felt in the pulses basket, with inflation showing a rising trend. This means that any sharp swings in output can derail food inflation which can start increasing again. This is why the RBI has flagged the issue of food inflation resulting from possible shortfall in monsoon due to El Niño as being the biggest threat to price stability.

A question often posed is whether or not the government can do anything to mitigate these ill effects. The answer is that if there are supply issues, then imports need to be reckoned with alacrity before prices start moving up. This would mean closely tracking the vulnerable regions as far as rains are concerned and the accompanying crops sown to take a call in time. The government has brought in stock limits for pulses, but this may only create red tape. All crops which are grown once a year have to be held by wholesalers and retailers for the entire period until the next crop arrives, and hence putting curbs only impedes trade. 

The next few months will be crucial and the monsoon progress will be watched closely by the government, as it will drive not just the entire growth process but also the inflation trajectory — both of which are critical this year. 

Bilateral deals, nothing dodgy: Economic Times 22nd June 2023

 

Leap of faith: The obvious can be invaluable when it comes to achieving career goals: Book review in Financial Express: 11th June 2023

 The library of business literature is replete with several treatises on how one should mould one’s life and be successful. These transformational expositions have various experts telling us what to do. Normally they are written keeping in mind the leader or CEO who can lead the team to greater heights by following a set of well deigned principles. They are meant to be inspirational, with the caveat being that while knowing what to do is good, it may not be adequate if we are not willing to change. That is where the challenge lies, because often the advice given appears to be pure common sense that we find difficult to apply. Either we think we are already doing the right things or are not willing to accept our shortcomings.

Sud and Narayan have written a very insightful book titled ‘Leap Frog’, which is a prescription about how to be successful in life by taking a leap of faith.

They talk of six practices to follow that can be game-changers. How is the book different from similar books of inspiration? The authors’ point is that when we want to go in for a transformation, we can liken the situation to a start-up. And the start-up in this case is ‘I’.

To begin with, their six steps are quite different from what we normally read about, as these have more to do with our minds. The authors say changing mindsets, though difficult, is fully under our control. For instance, they talk of showing grit and being steadfast in achieving goals. While one does experiment during the journey of life, there comes a time when we should know what to do and create a pathway. We need to define this goal or else we will never know what we are chasing.

Once we have this in mind, it is essential to nudge ourselves all the time. It seems quite logical that we need to see the goal and persevere wholeheartedly.

The third practice is very important for all of us, especially in our careers. We need to be intellectually humble. This is a trait to develop if we don’t have it. We cannot be right all the time and it is essential to also accept that others have a view that is relevant and pertinent. This is the way to grow or else we will be stuck in silos where the mindset could get outdated. Though this has been written from the point of view of individuals, we have seen several corporate failures due to the absence of this humility. Since companies are run by people, if leaders are not humble they could be prone to failure.

Then the authors talk of dancing with disciplines and here we may get confused with the first practice of showing grit. The authors talk of diversification in interests and knowledge. This makes a lot of sense not just from the point of view of connecting the dots but also providing a wider spectrum of knowledge.

Following from the fourth practice they talk of ‘curating the chaos’, which is where we really take our decisions as we move closer to our goals. Finally they talk of thinking like an entrepreneur and this is where they also encourage people to keep ‘asking’ because if one does not ask we will not be heard and hence will not have our requirements fulfilled.

One may say that these practices are very good on paper. But how do we go about it? As said earlier, recognising shortcomings in ourselves is the biggest challenge. Even if one does, sticking to a regimen is always difficult because one tends to forget to stop and introspect. Here they do provide a detailed tool kit to be pursued. We need to fill in the blanks and then move over to a calendar where we set goals for the future.

Where this book stands out is the approach of the narrative. The authors adopt the route of telling stories to explain each of these practices. It hence becomes easier for the reader to understand as to ‘what is a nudge’ or ‘how does one curate the chaos’. The book is based on a lot of research and the book of 250-odd pages has almost 20% space dedicated to these references.

Balasore Railway Tragedy Sparks Debate on Public Choice and Accountability in Governance: Free Press Journal 10th JUne 2023

 The Balasore railway tragedy raises some serious issues on the subject of public choice. The accident has sparked the usual blame game with fingers being pointed everywhere. Quite expectedly there is noise on the Minister taking responsibility and resigning, even though that will not change the equation. Setting up an enquiry to find the reason is more pragmatic especially if it is directed at systems failure rather than specific people. The latter won’t serve any purpose for taking any corrective action and will satisfy the establishment that action has been taken. There is talk that the ones responsible for the accident have been identified. How does that help? We need to go back to basics. 

The main issue pertains to what are the nation’s priorities and who draws them up? The problem with a democracy is that it is not possible for 1400 million people to decide on everything and just like how companies have a Board that oversees the management to address the principal-agent conflict, it is the Members of Parliament who take the decisions. Therefore what is called public choice is really the choice of the government in power or the MPs who run this entity. 

There has been change in ideology of late where public services and amenities are supposed to not exactly be a ‘public good’ but one where users pay for the service. There was a time when infrastructure was supposed to be taken on by the government because of people not being willing to pay for the same. Now the logic is that everything has to be paid for and there is no room for the ‘free rider’. As this cannot be made universal given that around 60% of the population is disadvantaged (based on the arithmetic that 800 mn people were provided free food during the pandemic as they were considered to be poor), there is dualism in the provision of services. For those who pay for services, the best in class is provided. For the others the same service comes at a quality which befits the price paid. 

And if people are paying for a service, they need to get the best quality. Therefore the tilt is on having grand express ways, airports and trains (Vande Bharat and bullet trains), which are comparable to the best in the world. This elitist turn has meant that there is less attention paid for services provided to the people which are not profitable to the government. All voices from economists buttress the elitist view of how the nation benefits from such grandiose and generous doses of nationalism are thrown in. 

If one looks at the long distance trains that leave from Mumbai, it is a revelation. In this day and age, the typical long distance train that goes to the north would follow this pattern. The train would have around 25 compartments of which two in the front and rear would be general ones. A general compartment is one which does not require a reservation and anyone with a bonafide ticket can travel. Before the train enters the station, touts occupy all the seats which are then sold for a price ranging from Rs 100-500 depending on the seating, with a window location justifying the highest commission. A compartment which has numbering till 72 will take in at least 120. At times besides people sitting at the entrance, one can find them occupying the toilets especially in the night. Often the lights and fans will not be functional and the window panes may be missing. This is the typical train by which the masses travel.

Now if one looks at the fares of the Vande Bharat trains and compared them with those of a regular train, the difference is stark. These trains are fully air conditioned but their fares are double that of a similar class in other express trains. This means that the trains are clearly elitist and also make the journey profitable for the Railways. It is just like the expressways which are well developed but have to be paid for use. The state and interior roads are in a state of apathy with pathways barely discernible once it is rural land. Such roads can be seen even when one moves off the western express highway and moves towards the Palghar-Dahanu region (all near Mumbai).

What all this means is that there has been little attention paid to safety of passengers who travel on the regular trains. Train derailment and accidents are not new in India and happen with regular frequency during monsoons when tracks get washed away. Curiously if one looks at the history of train derailments and accompanying accidents, rarely do the prestigious trains get involved as their routes are better monitored and the carriages are structurally more secure. That’s why one pays more for travel by Rajadhani and Shatabdi expresses. 

The focus on numbers and scale and anything new has diverted attention from maintenance and safety. This is why such accidents take place. And realistically, no one cares when common people die and even the compensations spoken of are hard to claim with form-filling and identification ensuring that half the people are left out. Hence even if one looks at the Budget and examines as to where exactly money is being spent, it is more for new projects rather than maintenance of existing ones. 

So what is the way out? There is need to clearly bifurcate our mindset into two streams where the government focusses on both the so called ‘elitist demands’ and ‘plebian necessities’. Resources need to be equally allocated for both the streams as ignoring the latter will always run the risk of such disasters. Unfortunately all such incidents are forgotten once a new event dominates headlines like even the India-Australia cricket match. The mindset has to change clearly. Capex for building only grandiose structures cannot be the overreaching goal and the existing infrastructure needs to be improved continuously. These will not win votes, but can save lives.

RBI has made it clear it isn’t yet time to think of a pivot : Mint 9th June 2023

 Formulating credit policy is always challenging because there is a need to balance various propositions. The most obvious one is the view on inflation. While it is low at 4.7% in April and would probably continue to be so for the next few months, interpretations vary. Normally, one tends to look at core inflation, which also has eased to 5.1% in April from 5.8% in March. But inflation interpretation is malleable, and just like how the concept of ‘core inflation’ came in, one can arrive at a further simulation. If one removes vegetables and edible oils, then the headline inflation rate would be higher at 6.2%. The point here is that inflation is low because of two elements, for which prices are driven by non-monetary factors.

Another area that has to be looked at even while targeting inflation is growth, which is more in line with the Keynesian school than Monetarist. In 2020 and 2021, the Reserve Bank of India (RBI) took the view that it will do everything possible to preserve growth, which means that this is also an objective. The good thing is that the latest gross domestic product (GDP) growth number at 7.2% proves that we are doing very well. RBI now sees GDP growth at 6.5% in 2023-24, which though lower is still impressive.

Besides, as extolled in the governor’s statement, there seem to be many positives for the economy and few negatives. In short, growth will not be a risk factor this year even though the quarterly trajectory would be on a declining trend from 8% in Q1 to 5.7% in Q4. This means growth can be ignored from the monetary policy standpoint at this point. In fact, RBI is very sanguine on all the three critical elements of demand: rural consumption, urban income, and private investment.

The statistician, however, will have a different way of looking at things given that the inflation story is still an enigma. Economic theory says that monetary policy works with a lag, which means that all the action taken so far will bring down inflation in the future. But when will this materialize considering the current low numbers have been brought about by vegetables and oils, which are insulated from monetary policy action? Here, the governor has said that the rate hikes of the past are still working through the system and there would be further downward pressures on inflation in the coming months.

With the uncertainty due to El Niño effects on the kharif crop, there is a major risk to inflation, which has been acknowledged by RBI. This has to be weighed with the fact that inflation is numerically down to less than 5% and will be so this quarter. RBI has not really changed much the inflation forecast trajectory for 2023-24, which it sees at 5.1% for the year. But the statistical effects will make it look low in Q1 at 4.6%, after which it would go back to 5%-plus levels in the next three quarters with Q2 and Q3 being progressively higher.

The problem in interpreting inflation numbers is that they are influenced by base effects, where higher numbers of the previous year lead to lower ones in the year under measurement. This gives the feeling that inflation is coming down, though prices may still be high and may not be easing sequentially, which is the case with most products in the ‘basket of goods considered for core inflation.

A conclusion that may be drawn is that another pause on rates looks likely for the next policy as there will be no real surprise element in terms of inflation being less than 5%. However, as the subsequent two quarters will see readings above 5%, a rate cut in Q3 may also not materialize, with inflation peaking at 5.4% before coming down in Q4. The markets may, therefore, have to wait for Q4 for the first rate cut. Besides, it also appears that other central banks will not be lowering their rates in a hurry, until there is more clarity on the inflation scenario.

The issue of stance is also interesting. It normally is changed to neutral before a rate cut. But the existing stance of withdrawal of accommodation has been retained, which is indicative of two things. The first is that there is plenty of liquidity in the system, which RBI is trying to draw out through the varable reverse repo rate auctions. This will continue until the level comes down to around 1% of net deposit and time liabilities. The second is that the difference between the repo rate and inflation is around 1.8%, which is the real rate. This number is probably acceptable to RBI, and it may be happy with a 1-1.5% difference over a longer period of time. Hence, if inflation stays around 5%, as is forecast by RBI, the markets can expect a 25-50bps rate reduction in the medium term.

The timing, of course, will depend on when RBI will be confident that the monsoon has progressed well and there is no risk of prices going up again. The increases in minimum support prices announced yesterday are significant, and RBI will be watching the impact on inflation. This will be known post-September. The immediate market reaction was unchanged and hence the 10-year yields will remain stable around 7% if the RBI forecasts hold. But short-term yields can be more flexible depending on the state of liquidity, which is presently comfortable thanks to the exchange of ₹2000 notes.

The major takeaway from this policy, which has not changed any lever and only marginally tweaked the inflation forecast, is that it is not yet time to even talk about the timing of, what has of late become a cliché in monetary policy talk, a pivot.

The bans on futures trading in farm products should go : Mint 7th June 2023

 

Rocky path to $2 trillion exports: Business Line 3rd June 2023

 There is a wave of optimism in the country as India will be the second fastest growing economy for the second successive year. Apart from aspiring to become a $5-trillion or $10 trillion economy, achieving the $2 trillion export target by 2030 has also become part of the narrative.

Trade data now captures the changing pattern in composition. Data which earlier used to cover only merchandise now includes services on a monthly basis which provides a comprehensive view of the trade situation.

The $2-trillion export target includes both goods and services. In FY23 goods exports amounted to $450 billion while that of services was $322 billion. In FY22 exports of goods were $422 billion while services were $254 billion. The ratio of services to goods exports has gone from 60 per cent to 72 per cent which is impressive.

To achieve the $2-trillion mark, the two segments needs to be looked at separately as the factors driving them are different.

Merchandise exports have had a bumpy ride as they are inextricably linked with the state of the global economy. During the period of Great Moderation (FY03-08), when global growth soared, exports grew by a CAGR of 24.5 per cent. When the financial crisis struck in 2008, things changed quite dramatically.

As the Western economies went into a tailspin Indian exports continued to do relatively well with growth of around 14 per cent for the next quinquennium ending FY13. It was argued then that the emerging economies were decoupled from the West and China and India drew some benefits.

Subsequently growth averaged just 0.6 per cent for the period FY14-18 which then improved to 9.6 per cent for the period FY19-FY23.

The curious part of these trends is that in two years of each quinquennium there have been negative growth rates. Therefore the path has not been even, which shows that world growth prospects are a major factor.

The CAGR of exports in the last 15 years has been around 7 per cent. Nominal GDP growth for this period has been 12.1 per cent. Hence quite clearly growth in exports has not kept pace with GDP growth as it is dependent on external conditions. Intuitively, being less reliant on goods exports has insulated India from global recessions. This is what is seeing us through in the period FY23-FY24 as the world moves into the slowdown mode.

Also it has been observed that when exports have increased sharply, the petroleum component has been one of the drivers. In FY23 for example when exports peaked at $450 billion, $97 billion were from refined oil products. This means that there is a pass through of higher imports of crude through this value addition process. Hence high exports growth aided by petro-products is accompanied by a higher trade deficit.

Services exports

Exports of services has been an enigma. Around 50 per cent of services exports is accounted for by the IT sector. The advantage here is that around 90 per cent of the inflows are would be accounted for in net terms too. For other services like tourism, transport, IPR there are negative net flows as the outflows tend to be higher as it is the case with open economies.

Services export ($254 billion in FY22) has risen quite sharply in the last two years post Covid. In FY23 they have peaked at $322 billion. Growth in the 10-year period ending FY23 was 8.2 per cent. For the seven-year period ending FY20 it averaged 5.6 per cent. However, in the last two years, growth has risen phenomenally from $206 billion to $322 billion. IT’s share is likely to be upwards of 50 per cent in FY23 too. The question is whether this momentum can be maintained.

Achieving the target by 2030 appears unlikely going by the trends observed for goods. To reach the target of $2 trillion in seven years, both components have to grow at a CAGR of 15 per cent a year which is a tall order. Going by past trends, goods exports are likely to growth at 10 per cent a year. This would also mean that the world economy has to keep accelerating which is unlikely given that the upward part of the cycle tends to be shorter than the downward movement.

The tech turn

Services exports’ impressive growth despite the global slowdown can be attributed to the greater use of technology across industries during the lockdown which has intensified subsequently. The focus on AI and ML has increased demand. But sustaining this high level will be the challenge.

In the past it has been seen that the boom time normally lasts for a period of 3-4 years before reverting to trend growth. For the next seven years at the higher end growth can be around 12-13 per cent. This combined with 10 per cent CAGR in merchandise exports can achieve the $2-trillion mark in nine years. It would take another two years in case merchandise and services increase by 7 per cent and 10 per cent respectively.

Exports of merchandise are largely coming from the SME sector which is facing headwinds. Government support through PLI needs to get translated into higher investment and output.

Services can grow for sure but will tend to slow down once initial economies are realised. The silver lining is that given the challenge in getting work permits in the US, companies are also working from India to provide such services.

Services exports will play a vital part in controlling our current account deficit as imports will tend to increase as growth accelerates. Services can temper this increase and ensure that CAD remains closer to the 2 per cent mark which will help the economy to increase forex reserves along with steady capital inflows.

Impressive growth, but will it sustain? Financial Express: 1st June 2023

 The GDP growth estimate for FY23, at 7.2%, is much better than earlier projections and hence there is credit due for the same. In a difficult year, the country has done well, which gets reflected across almost all the sectors. The dark spot remains manufacturing, which is estimated to grow by just 1.3%—the lowest among the eight-sector-classification. This is worrisome.

Manufacturing was supposed to take on the role of the engine for growth and account for 25% of the GDP. This remains a distant dream, and the unfortunate part is that this sector has been lagging for a long time now. The discomfort stems not merely from the sector’s low value-addition growth but also the underperforming private-sector investment here.

The problem is circular in nature. For an economy to takeoff, spending on both consumption and investment is needed. Consumption depends on income generation, which becomes sustainable only when more jobs are created. Today, the situation is that while jobs are being created, it is more in the services areas of retail, e-commerce, delivery, construction, etc, that fall in the realm of blue-collar labour. Such jobs, though good for the purpose of subsistence, do not help one to break the barrier from where one can migrate to consumption of higher-value goods and services. This is where manufacturing matters and can create skilled jobs, which, in turn, sets in motion a virtuous cycle.

Investment from the private sector has been limited because of this reason. As consumption at the household level is still limited, the capacity utilisation rates are low and there is no compulsion to invest more. Investment is more in areas where infrastructure is involved, where the Centre and states are also pushing capex. As the governments spend on roads, railways, ports, airports, irrigation, etc, there is a push for steel, cement, and the likes, which leads to higher capacity utilisation and hence investment. This skewed matrix has to change.

The government has been pushing industry through incentives, with the latest being the PLI. It is a performance-based scheme, and while it sounds good, the results have not been too positive. It has worked for mobile phones, where exports have gone up. But electronics imports have also risen sharply and the substitution that one hoped has not yet materialised. This is where the SMEs matter and have potential to push output and exports. But their story remains the same as before, and while credit incentives have been given, these have not resulted in a higher growth trajectory. Given their size and scale, they continue to be ancillary to the larger companies.

Service-sector segments have witnessed good growth in FY23. Construction has grown by 10%, which can be linked to the boost in housing as well as roads. Will this be sustained in FY24? To an extent, yes, as the government capex spending is aggressive. But, the housing component can be a bit wobbly, given the cost of borrowing has risen with the rate hikes.

Trade, transport, hotels, etc, had grown by 14%, which is equivalent to the growth in FY22. This is impressive, but has been pushed up by the pent up demand witnessed all through the year after the services sector was fully opened up post April 2022. This has been a bonanza year for the sector as people went out and spent on these services. But inflation in segments like recreation, travel, restaurants, hotels, etc, has been upwards of 6% for three successive years. This will bite at some point of time, and it will be interesting to see if the tempo can be maintained going ahead.

The financial sector and real estate segment have clocked growths of 7.1%, which is higher than that in FY22. This is based on higher growth in bank deposits and credit and the performance of the real estate sector. With growth in credit to slow down this year as higher interest rates become effective, there would be moderation in growth in this space.

The last is agriculture. Here, the sector has been rather buoyant despite the apprehension which about the rabi crop prospects, given the extreme heat conditions this time round as well as the unseasonal rains. With the spectre of El Niño, an adverse impact cannot be ruled out; this will affect not just GDP value addition but also rural income. Most companies in the consumer space have pointed at weak rural demand in FY23 that has affected auto as well as FMCG firms. Therefore, there will still be some concern here.

While the growth of 7.2% in FY23, over 9.1% in FY22, is quite impressive, the growth level in FY24 will be lower as the opportunities from the opening of the economy have been more or less exhausted. This being the case, demand would get tempered down. Capital formation in FY23 has increased marginally from 28.9% to 29.2%, which can be attributed more to the government intervention and housing boom. There will be limits to the repetition of these scenarios next year. Growth of 6-6.5% looks likely, with the lower end being possible in case of monsoon being less than normal; 6.5% would be the best possible outcome at a time when exports will, once again, not be contributing much to the growth process.