ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Can Growth Be Sustained?

Slump in consumption, surging prices, and slow growth in key sectors are likely to stall the recovery.

The provisional estimates of the annual national income for 2021–22 and the quarterly estimates of the gross domestic product (GDP) for the fourth quarter released by the National Statistical Office present a bleak picture. Numbers show that the GDP growth in 2021–22 has bounced back to 8.7% after the 6.6% decline in 2020–21. But the quarterly growth rates have steadily declined from 20.1% to 8.4% and then to 5.4% and further to 4.1% over the year.

The optimists point out that the size of the GDP at `147.35 lakh crore in 2021–22 is 1.5% higher than in 2019–20, which means that the economy has bounced back to the pre-pandemic levels in a single year. They also argue that the pickup has been extensive with seven of the eight segments of the economy (except for trade, hotel, transport, and communications) recovering back to the pre-pandemic levels. However, this improvement in the GDP is notional. This is because the real per capita income or the average amount of money earned per person adjusted for inflation, which measures the standard of living, is only `91,481 in 2021–22, which is still 0.7% lower than in 2018–19. It means that the quality of life of the nation and citizens’ overall well-being is still lagging by at least four years.

Apart from this substantial setback to the standard of living, the other major reason for worry is the dim prospects for sustaining the recovery. Trends in important indicators like private consumption expenditure and inflation and also from important segments of the economy like manufacturing and construction signal increasing distress that can stall or even derail the recovery.

The quarterly growth of private final consumption expenditure at constant prices has dropped from a high of 14.4% to just 1.8% over the last four quarters. Consequently, the share of private consumption spending has slipped sharply. However, this dip is unlikely to be compensated by higher consumption spending by the government as the relative size of the union budget has shrunk sharply in the last two years. Similarly, the external sector demand that boosted the recovery in 2021–22 has also faltered. Quarterly numbers show that the growth of exports of goods and services has dipped by more than half over the year. And the war in Europe will now further aggravate these negative trends. With both engines of the economy—domestic and external demand-losing momentum sustaining the recovery will be a major challenge for the policymakers.

The second major reason for worry is the surge in inflation levels. The three major measures of inflation that are widely used are the consumer price and wholesale price indices and the GDP deflator. While the first index measures trends in prices of a few important consumer goods and services, the second exclusively measures trends in wholesale prices of goods. Only the GDP deflator measures the overall changes in the prices of all the goods and services in the economy. The GDP deflator, estimated from the national income numbers, shows inflation has more than doubled to 10.8% in 2021–22, the highest level since 1991, that is in 30 years. Further, this double-digit inflation has been sustained across all the four quarters of the year, and this would be a major factor contributing to the steady deceleration in the growth of real per capita income, consumption, and exports.

Another reason why this surge in overall prices will stall the recovery is the wide disparity in the GDP deflators in different segments, which will have a significant impact on the terms of trade and affect the sectoral and overall growth rates. This is especially so since rising prices have sharply turned the terms of trade against agriculture. The GDP deflators show a slower increase in agriculture prices (7.3%) as compared to manufacturing goods prices (12.1%) or the prices in the overall economy (10.8%). This is a sharp reversal of the earlier trends when the terms of trade were moving in favour of agriculture.

The shift in terms of trade against agriculture has serious consequences as a disproportionately large segment of the rural population is dependent on the sector. It will badly hurt rural incomes and consumption, further eroding the standards of living, accentuating the shrinking consumption demand, and stalling the overall recovery. Similarly, the surge in prices of manufactured goods, which account for the bulk of Indian exports, to double digits will also hurt exports and accentuate the slackening external demand.

The third factor, apart from shrinking private consumption and the highest inflation in decades, that can stall the recovery is the sharp slowdown in some critical sectors. The fourth quarter numbers show that only three of the eight segments of the eco­nomy have posted buoyant growth rates above 5%. Output in another three segments is in the 4%–5% range. However, growth in two critical segments of the economy, namely construction and manufacturing, has dipped sharply. While the construction sector growth, which largely reflects the gross fixed capital formation or investments in the economy, has slumped to 2%, that of the manufacturing sector output has declined. The slowdown in these two core sectors will most likely be transmitted to the other sectors in the coming months.

The impact of these structural constraints on the recovery will also be further aggravated by the shift in the monetary policy stance. With the prices in the economy surging to record highs, the central bank has no option but to bite the bullet and continuously raise interest rates. The consequences will be disastrous for sustaining the recovery and boosting overall economic growth.


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Updated On : 18th Jun, 2022
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