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.