What does the future hold for the Indian economy post Q4 GDP numbers?

On May 31, the National Statistical Office (NSO) released the data for India's Gross Domestic Product (GDP) growth in the fourth quarter and full financial year 2021-22.

The Indian GDP growth fell to 4.1% in the fourth quarter of the last fiscal year, its slowest pace in a year. However, economic growth beat the forecast.

In comparison, Asia’s third-largest economy grew by 20.1%, 8.4%, and 5.4% respectively in the first three quarters of the fiscal year 2022.

India’s GDP, at constant prices, was estimated at ₹147.36 trillion. The 2021-22 GDP growth rate rose at a pretty decent rate of 8.7%. At current prices, the GDP was ₹236.65 trillion, recording an annual growth of 19.5%. The per capita GDP was Rs. 107,670.

January to March quarter GDP readings showed that economic growth was slightly higher than economists' expectations of 4% growth, according to a Reuters poll of economists.

The latest numbers for 2021-22 make India one of the fastest-growing major economies in the world, although the momentum of expansion in the months ahead will be tested by high inflation and the need to raise interest rates to combat price pressures.

Among the three broad sectors, industry — which grew at 10.3 per cent — saw the highest growth in 2021-22, compared to a contraction of 3.3 per cent in 2020-21. The industry was followed by the services sector, which grew at 8.4 per cent in 2021-22 compared to 7.8 per cent in 2020-21, and agriculture, which grew at 3 per cent in 2021-22.

Further, the fiscal deficit for 2021-22 settled at ₹15.87 lakh crore or 6.7 per cent of GDP, compared to the revised target of ₹15.9 lakh crore, or 6.9 per cent of the GDP.

Let us look at each component of GDP to see which performed the best.

Consumption

The important component of GDP is Gross Private Consumption Expenditure (GPFCE). It is an effective proxy for overall demand in the economy.

The Indian economy has been consumption-driven over the last three decades since economic liberalisation, which accounts for a shade over 56 per cent of the total GDP.

Private Final Consumption Expenditure — or PFCE — was up a mere 1.8 per cent year-on-year in the January-March quarter.

In 2021-22, the PFCE was about ₹83.8 lakh crore, up 7.9 per cent compared to 77.6 lakh crore in 2020-21 and ₹82.6 lakh crore in the pre-pandemic year 2019-20.

The obvious reason for the marginal increase in private consumption is the omicron variant-led third wave, which led to restrictions being imposed on movement and economic activities in several parts of the country. In addition, high food and fuel prices have impacted the purchasing power of the common man.

As per the CMIE survey data, at an aggregate level, a large part of the labour force has shifted out of relatively high-paying jobs in the manufacturing and services sectors to low-paying jobs.

Two-wheeler sales declined about 11 per cent in the fiscal year. Two-wheeler sales declined by about 3.6 per cent in April 2022 compared to March 2022, indicating weak rural consumption.

Going forward, experts believe that growth in private consumption will be elusive for some time due to high inflation and an increase in borrowing costs.

According to the survey conducted by the local circles in May shows that 92 per cent of households said their monthly household expenses have risen in the last three months due to the rise in petrol, diesel, and edible oil. Further, 70% of those surveyed saw at least a 10 per cent increase in their monthly budget, while 55% expect prices to go up by another 10 per cent in the next 3 months.

When families are financially secure, they naturally spend money on products; however, during a period of severe inflation, families cut back or postpone their purchases and will only spend money on necessities. If this occurs, demand will slow down in the economy.

Moreover, increasing inequality, which many economists have called K-shaped growth, will also put pressure on consumption.

The latest round of the ICE360 Survey 2021, conducted by People’s Research on India’s Consumer Economy (PRICE), shows that since economic liberalisation, the annual income of the poorest 20% of Indian households, which had been constantly rising since 1995, plunged 53% in the pandemic year 2020–21 from their levels in 2015–16.

In the same five-year period, the richest 20% saw their annual household income grow by 39%, reflecting the sharp contrast COVID’s economic impact has had on the bottom of the pyramid and the top.

Meanwhile, RBI consumer confidence surveys and C Voter surveys have indicated weak consumer sentiments since March 2022.

Two out of three respondents in the May 2022 survey say they find it very difficult to manage family expenses. Unless consumer sentiments improve, the high GDP growth rates are not sustainable.

Going ahead, there is a silver lining in the form of savings, the financial savings of the household sector in 2020–21 surged 3.6 percentage points to 11.5% of Gross National Disposable Income (GNDI), the highest in two decades, as COVID forced people to cut unnecessary spending and save for a rainy day, according to the RBI annual report.

In absolute terms, the financial savings of the household sector increased by Rs. 6.91 lakh crore during FY21. Experts believe the high household savings may translate into more investments in the future.

Investments

Gross fixed capital formation (GFCF), a measure of investment in the economy, has risen to 47.8 lakh crore, which is a 15 per cent jump from the first pandemic year. In 2021–22, fixed capital creation was 3.7 per cent higher than in the pre-pandemic year, 2019–20.

During the pandemic year, 2020–21, the GFCF fell by 10 per cent to ₹41.3 lakh crore, from ₹46.3 lakh crore.

In the January-March period, GFCF managed a stronger increase of 5.1 per cent.

According to the CMIE report, in the quarter ended March 2022, the net profits of listed companies reached a new peak of Rs.2.66 trillion. At this level, net profits are 12.6 per cent higher than in the previous quarter and 24.1 per cent higher than in the corresponding year-ago quarter.

Non-finance companies contribute the bulk of the total profits of the corporate sector. Of the Rs. 2.66 trillion in net profits were reported by all 3,288 companies, the 2,402 non-financial companies reported profits of Rs. 1.85 trillion.

Non-finance companies reported a 27.4 per cent year-on-year increase in net sales in the March 2022 quarter. The year-ago quarter, January-March 2021, was reasonably normal, and therefore, the increase in sales is not vitiated by any base effect. But, it has been impacted by a sharp increase in prices over the past one year. 

Commodity prices have shot up sharply during the January-March 2022 quarter. Inflation has been high in the earlier quarters as well. As a result, a large part of the y-o-y growth in March 2022 is because of inflated prices.

The inflation-adjusted y-o-y increase in net sales of non-finance companies in March 2022 was 5.3 per cent, said the report.

The increase in commodity prices inflated sales, but it also squeezed margins. Raw material costs increased by 40.1 per cent year on year, while power and fuel costs increased by 47%, and the cost of goods increased by 30%.

Growth in the wage bill was relatively modest at 13.3 per cent. As a result, non-finance companies' total operating costs increased by 30.4 per cent year on year in the March 2022 quarter.

Analysts predict that a rate hike, a rise in bond yields, and a fall in the rupee will hurt India Inc's margins in the future. With corporate earnings already under pressure because of soaring input costs, the end of the era of cheap money is set to add to their challenges.

According to experts, the impending rate hikes combined with sharper input costs are expected to force companies to go slow on expansion plans to conserve cash. Companies, especially those with weaker balance sheets, are likely to redraw spending plans.

On April 8, 2022, the RBI released the Inventories and capacity utilisation survey—which provides a snapshot of demand conditions in India's manufacturing sector.

According to the RBI surveys, the latest number, for the last quarter of 2021, was 72.4 per cent, ensuring questions remain about the revival of private investment.

Expenditure

Private consumption holds the key if the high GDP growth rates are to be sustained. The GDP growth rate in the last quarter (January to March) of fiscal 2021-22 was just 4.1 per cent.

This was primarily driven by government expenditure because private consumption grew at a very low 1.8 per cent during the quarter.

Government final consumption expenditure (GFCE), which is a measure of the overall government's spending on goods and services, was 10.7 per cent of the GDP in 2021-22.

With the exception of mining, machinery, metals, and chemicals, investment in most sectors has remained below pre-Covid levels, as per CMIE. Investments in the manufacturing sector were 12.1% above pre-COVID levels, led by machinery, metals, and chemicals, Nirmal Bang wrote in a note on Friday.

CMIE data also shows that the new Capex investments in Q4FY22 marginally crossed Q4FY20 levels.

Road construction and new awards by the Ministry of Road Transport and Highways (MoRTH) hit a new record in March 2022 but slowed in April 2022.

According to Nirmal Bang Securities, the metals sector continues to lead Capex's intentions in 2022, accounting for around 53% of investment proposals. Metals, followed by fermentation industries (Pharma) and electrical equipment, have benefitted from the PLI scheme.

Government Capex increased 39% year on year to a record of ₹5.9 lakh crore. And it has no intention of slowing down, even in a highly inflationary environment.

The Capacity utilisation exceeded 70% in Q3FY22. Capacity utilisation of around 80% usually acts as a trigger for Capex recovery, it added.

On May 19, Finance Secretary TV Somanathan told ET that capital investment is needed for the long-term growth of the economy and short-term developments should not distract from that goal. The government has budgeted ₹7.5 lakh crore for capital expenditure in FY23, compared with a revised ₹6.03 lakh crore Capex in FY22.

As per CareEdge, the government's expenditure during the fiscal was mainly focused on asset creation, with the Capex-to-total expenditure ratio rising to 15.6 from 12 in the previous year.

Net Exports

In 2021-22, India exported goods worth over ₹31 lakh crore. At the same time, its imports — at ₹38.78 lakh crore — were 22 per cent higher. This gap was about 12 per cent last year and 18 per cent in 2019-20.

What is the takeaway

High inflation, soaring energy and commodity prices due to the Russia-Ukraine war are threatening to squeeze the economy. In addition, interest rate hikes would also start impacting real GDP. A favourable monsoon, on the other hand, will help temper inflation while also increasing demand, which will help the economy recover.